PriceStats®: Inflation Reacceleration

A look at quarterly measures of inflation, based on prices of millions of items sold by online retailers, to help investors anticipate and evaluate the impact of inflation.

As brutal as the Q3 bond market sell-off was, it had little to do with the inflation trend.

Headline inflation has reaccelerated in the US and is again running at a quarterly rate above seasonal norms (Figure 1). This is almost entirely due to higher energy prices. So, while headline inflation may edge higher once again, readings on core inflation look to remain more benign.

US Core Inflation Readings Contained for Now

The PriceStats sector series are especially encouraging in this regard. The prices of household equipment, furnishings, and operations — a useful proxy for goods price inflation and housing market trends — fell across Q3 for the first time in more than two years.

This signals that supply issues in the goods sector have fully normalized and the long-awaited slowdown in housing market inflation is finally coming. Of course, contagion from higher headline inflation could work back into core measures. We’ve seen that in recent years.

But, for now, the more favorable disinflationary trend in core inflation remains intact. And it’s equally encouraging that so far there’s been little impact from higher energy prices on market-based or consumer inflation expectations.

Inflation Is Back in Japan

Most countries have set policy over the past two years to squeeze unwelcome inflation out of the system. But in Japan, the aim has been to encourage inflation. And now, after two decades of failed attempts, inflation finally appears to be back.

Perhaps the easiest way to demonstrate this is to plot an index of Japan’s price level (Figure 2). Between 2010 and 2021 the price level was little changed. Inflation was close to or below zero, apart from the odd tax-inspired blips. But in the middle of 2021, online prices in Japan began to move differently, rising regularly in a similar way to most of the other countries where we collect data.

With official data now following, the trend in inflation shows no signs of changing: Inflation is back.

While this is a welcome development, it also suggests that the Bank of Japan (BoJ) will need to continue to roll back its ultra-accommodative monetary stance. Given outflows from Japanese investors have been a key source of demand for foreign bond markets, how the BoJ reacts to the prospect of higher yields in their local market will be watched closely indeed.

Emerging Market Inflation Reaccelerates

The rebound in oil prices is proving potentially more problematic for emerging markets. Food and energy are bigger weights in emerging market (EM) inflation baskets, and this will be compounded in a number of cases by weakness in local currency markets.

Pass through typically happens faster in higher inflation EM economies, and that’s proving true now. The month-on-month gain in the PriceStats EM aggregate in September was close to 2%, the biggest rise since Russia’s invasion of Ukraine — and enough to prompt a sharp acceleration in the aggregate annual inflation rate (Figure 3).

In a similar vein to the US, much of this may be due to energy, but it creates extra complications for countries where easing cycles have already begun. This is another obstacle in an already difficult investing environment for EM local currency bonds.

Get more insight into today’s higher-for-longer environment in our Q4 Bond Compass.