What do the inflation data released this week in the euro zone, the UK, Japan and China tell us?

Silvia Dall’Angelo, Senior Economist at Federated Hermes Limited

China’s GDP growth grounded to a halt in Q4 due to Covid-related restrictions, but still managed to outperform a downbeat consensus looking for a quarterly contraction. Looking ahead, China’s exit from their zero-Covid policy should boost growth to 5.5-6% in 2023. However, China is facing longer-term challenges such as the ongoing correction of the property sector, negative demographics and declining productivity growth, meaning that it is unlikely to be the engine of global growth that it used to be.

The Bank of Japan surprised markets by sticking to its Yield Curve Control policy at its latest meeting this week, having tightened its monetary policy stance at its previous meeting in December. We still think that the BOJ will tighten monetary policies over the year in response to building inflationary pressures, but in a gradual and non-linear fashion. Contrary to most central banks, the Bank of Japan seems to believe that monetary policy changes are more effective when they are unexpected. Hence the exit from yield curve control won’t be predictable, although the change of leadership at the central bank in the Spring should impart the process some momentum.

UK CPI inflation declined slightly to 10.5% in December, from 10.7%, matching consensus’ forecasts. However, the report failed to give the Bank of England much comfort; not only did inflation remain in double-digit territory, but core inflation also proved sticky at 6.3%, well above target. Sticky inflation in services, stronger wage growth, concerning developments in inflation expectations and wage negotiations imply that the Bank of England will likely remain in tightening mode at its next meeting in early February.

Eurozone HICP inflation was confirmed at 9.2% in December, down from 10.1% in November. The decline was driven by the energy component – dragged down by lower oil prices and German subsidies – while core inflation pushed higher to 5.2% in December, from 5%. Looking at 2023, headline inflation is likely to continue to trend down, reflecting the recent declines in energy prices, base effects and the impact from the easing of global supply disruptions. Nonetheless, core inflation is typically sticky and slow-moving, and will likely keep headline inflation above target throughout this year.