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Turning off the tap

Transitory

The biggest stories related to inflation, monetary policy and the link between them. In the United States inflation – still held to be “transitory” by the Federal Reserve – popped to a 13-year high. In New Zealand the central bank said it would reduce its asset purchases in response to rising prices.

When they saw the US consumer price index numbers investors were forced to ask themselves what exactly constitutes “transitory” upward pressure on prices. With only a couple of hesitations last August and September, headline inflation has been moving progressively higher for 12 months. The 5.4% print for June 2021 was the highest in 13 years. Oil prices have a lot to do with the situation but, even stripping out food and energy prices, “core” inflation was up at 4.5%, its highest level since November 1991.

It could indeed be that high inflation today is an anomaly caused by Covid-depressed prices last year. But at what point does transitory become the new normal? Investors could come to no immediate conclusion about that yesterday. The US dollar jumped higher, dropped back and then headed north once again. It is an average of 0.3% higher, sharing second place with the Japanese yen.

 

Near-term spikes

Where the Fed talks of transitory inflation the Reserve Bank of New Zealand sees “near-term spikes” reflecting “factors that are either one-off in nature, such as high oil prices, or expected to be temporary in duration, such as supply shortfalls and higher transport costs”. Is there a difference? Discuss.

Spikes or not, the RBNZ still saw a need for action. In its monetary policy announcement this morning, entitled “Monetary Stimulus Reduced”, the bank kept the Official Cash Rate unchanged at 0.25%, and stuck with the existing Funding For Lending Programme, while bringing to an end next week additional asset purchases under the Large Scale Asset Purchase programme.

The news cannot have come as a complete shock. Only a week ago the NZIER’s bullish Quarterly Survey of Business Opinion had led investors to suspect that some form of tightening might be on the cards. Even so, it was still enough to put a rocket under the Kiwi. The NZD instantly became the day’s top performer, adding an average of 0.7%. Sterling is more than a cent and a half behind, down by an average of 0.2%.

 

More inflation, more central banks

Ahead of the RBNZ announcement, Wednesday began with the Westpac-Melbourne index of consumer sentiment, which rose by a point and three quarters to 108.8, a 23.8% improvement on the year. Also on the agenda is inflation data from Spain and Britain, a policy announcement by the Bank of Canada, and the Fed Chairman’s six-monthly testimony to the House Committee on Financial Services.

As was the case yesterday in the States, this mornings’ British CPI numbers were bigger than expected. Headline inflation was up from 2.1% to 2.5%, a near-three-year high. Released at the same time, the producer price inflation data showed manufacturers’ costs increasing by an annual 9.1% while factory gate prices went up by 4.3%.

During the London day there are figures for Eurozone industrial production, US producer prices and Canadian manufacturing sales. Tonight brings Australian employment and Chinese data for house prices, industrial production, retail sales and second quarter gross domestic product. The UK employment numbers appear at 0700h on Thursday morning.

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