December 6, 2021

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Will eurozone inflation continue rising?

Eurozone inflation updates

Pockets of inflationary pressures are emerging

Eurozone consumer price inflation is expected to continue to climb in August after rising to a year on year rate of 2.2 per cent in July, up from 1.9 per cent in the previous month and the highest levels since 2018.

A poll by Reuters ahead of Tuesday’s data release forecast the eurozone inflation rate to rise to 2.8 per cent in August, the highest since 2012. Fabio Balboni, economist at HSBC, expects an increase on that scale, largely because core goods prices, such as clothing, fell sharply in August last year.

He also noted “some genuine pockets of inflationary pressures” emerging in the eurozone, particularly in the tourism sector, as businesses reopen but companies are still affected by reduced capacity.

Balboni forecast eurozone inflation to peak at 3.3 per cent in November before falling back in 2022. This is well above the 2.6 per cent forecast by the European Central Bank for the final quarter of the year, which it attributed to the reversal of the German VAT rate cut, the rebound in energy costs and the effect of the supply chain disruption on input prices.

Line chart of Annual % change, by date of forecast showing Forecasts for 2021 eurozone inflation are being revised up

High inflation rates are not expected to lead to any monetary policy tightening, at least for the moment, according to many economists. Balboni says the ECB will “look through the inflation spike and stick to its highly accommodative monetary stance”.

Mateusz Urban, economist at Oxford Economics, shares “the ECB’s assessment of the recent acceleration in headline inflation as transitory”, as he expects supply to gradually catch up with demand and base effects to fade away. He noted that “despite still-unresolved supply bottlenecks and a rapid recovery in labour markets across the bloc, underlying price pressures in the eurozone remain muted.” Valentina Romei

Have supply chain problems and coronavirus placed further pressure on China’s factory sector?

July was a rough month for China’s economy and August has looked just as bad, if not worse. This week, investors’ eyes are trained on the first big economic indicator for the month in the form of the country’s official manufacturing purchasing managers’ index.

July’s manufacturing reading came in at just 50.4, barely above the 50-point threshold separating growth from contraction. August has brought a new string of disruptions, including lockdowns to contain outbreaks of the Delta coronavirus variant, which have interrupted supply chains and forced the partial closure of a Chinese port. Severe flooding has also disrupted production.

July’s readings were already enough for many economists to lower their forecasts for China’s annual economic growth, with imports of key commodities falling, while retail sales growth, credit growth and industrial production all slowed markedly. A poor showing in August could further dampen expectations and depress enthusiasm for Chinese assets.

“China’s business momentum may continue to moderate in August on the back of extreme weather conditions and local Covid-19 resurgences,” said Khoon Goh, head of Asia Research at ANZ. Goh said falling steel output, depressed by diminished expectations of a domestic recovery, along with other signs, “all hint at a softening in business momentum in the manufacturing sector”.

A median estimate from economists polled by Bloomberg calls for China’s manufacturing PMI to edge down to 50.1 in August. With some analysts already expecting Beijing to start easing in the fourth quarter following July’s rough patch, the pressure to loosen policy could become even greater if this month’s reading on factory activity comes in lower than expected. Hudson Lockett

Is the US labour market recovery gathering steam?

Friday brings yet more clarity on the state of the US labour market, which will prove decisive in determining when the Federal Reserve begins scaling back some of the emergency stimulus measures it unveiled last year.

Last month’s report showed signs that acute worker shortages, which have hampered the recovery, have begun to ease. Nearly 950,000 jobs were created in July, pushing the unemployment rate to 5.4 per cent. 

While that still leaves nearly 6m more Americans out of work than in February 2020 before the pandemic struck, those gains represent an important improvement in what has been a fitful healing process. Employers have struggled to fill a record number of job openings owing to a combination of childcare issues, concerns about catching Covid and enhanced employment benefits, according to policymakers, and economists expect some of the issues to have eased further in August. 

A consensus forecast compiled by Bloomberg indicates 750,000 jobs added for the month, with the unemployment rate falling further to 5.2 per cent.

The Fed has pledged to buy $120bn of Treasuries and agency mortgage-backed securities monthly until it achieves “substantial further progress” on its goals of average 2 per cent inflation and maximum employment. The recent run-up in US consumer prices has convinced many central bankers that the first of these thresholds has already been met, but the slower labour market recovery has held up an immediate adjustment to the bond-buying programme.

Investors largely expect the Fed will signal in September that the economy continues to advance towards its goals but hold off on any “taper” announcement until November or December. 

The recent surge in coronavirus cases tied to the more contagious Delta coronavirus variant may push back that timeline, but there exists a vast amount of uncertainty about its economic impact. Colby Smith

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