Inflation – Back on the scene of downward surprises


Band Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income

Unpleasant inflation surprises point to a slowdown in the pace of rate hikes, or even a pause in some emerging markets. In China’s case, lower-than-expected inflation may not pave the way for additional stimulus.

Context of benign inflation in China

Today is a big inflation day – and we have a lot of bad surprises across the world, starting with the United States (both base and title). What to do with it? In emerging markets (EM), a big takeaway in China is it the Zero COVID policy continues to freeze domestic activity – just like Vonnegut’s “ice-nine” The cat’s cradle. Core inflation moderated to just 0.8% yoy in July (see chart below), and one of the main reasons why annual headline inflation accelerated to 2 .7% was a huge 25.6% monthly jump in the price of pork. The most obvious implication is that the inflationary backdrop gives the central bank (PBoC) plenty of room to stimulate the economy, except that the the central bank has not been too inclined to open the monetary taps (at least for now). We’re keeping an eye on China’s July credit aggregates – released later this week – for more colors and insights.

Takeoff of Thailand’s policy rate

Thailand inflation is more than 3 standard deviations above the multi-year trend, but the latest inflation print has been weaker than expected. That’s why there was a sigh of relief that the the central bank finally started its tightening cycle today. There were no bad surprises (a modest move of +25 basis points) and the central bank indicated that it proceed gradually due to growth issues (we have repeatedly spoken of a “cliff” in potential growth in the second half of the year), but at least the process of policy normalization is now underway. The baht was meticulously preparing for the maiden rise – appreciating against the US dollar since late July.

Break in the Czech Republic’s policy rate

Today’s most intriguing inflation print comes from the Czech Republic. Headline inflation accelerated further to 17.5% year-on-year in July, but bad surprise. Importantly, the impression was below central bank projection for the month. So does this mean that the Will the interest rate pause be extended? This cannot be ruled out, given the accommodative bias of new board members. In addition, the central bank relied heavily on Foreign exchange interventions to cap the depreciation of the krone and reduce the transmission of exchange rate inflation. The Czech National Bank’s international reserves are large enough to support significant foreign exchange interventions ($7.4 billion in June, according to Bloomberg LP) for a little longer. Stay tuned!

Chart at a Glance: China Inflation – No Sign of Underlying Pressures

Source: Bloomberg LP

Originally published by VanEck on August 10, 2022.

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PMI – Purchasing Managers Index: economic indicators drawn from monthly surveys of private sector enterprises. A reading above 50 indicates expansion and a reading below 50 indicates contraction; ISM – Institute of Supply Management PMI: ISM publishes an index based on more than 400 surveys of purchasing and supply managers; in both manufacturing and non-manufacturing industries; CPI Consumer Price Index: an index of the change in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indices that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal consumption expenditure price index: a measure of US inflation, tracking changes in the prices of goods and services purchased by consumers across the economy; MSCI-Morgan Stanley Capital International: a US provider of equities, fixed income, hedge fund stock indices and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows market expectations for 30-day volatility. It is constructed using implied volatilities on S&P 500 index options; GBI-EM – JP Morgan Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by emerging market governments; EMBI – JP Morgan Emerging Markets Bond Index: JP Morgan index of sovereign bonds denominated in dollars issued by a selection of emerging countries; EMBIG – JP Morgan Emerging Markets Global Bond Index: tracks the total returns of external debt instruments traded in emerging markets.

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