Japan’s PPI Cools in August – Still Runs Hot

One thing is clear: it is not a deflationary world Japan's PPI headline cooled in August, rising by only 0.1%. However, the headline for the all-manufacturing PPI rose by 0.3%, indicating more pressure.

Sequential inflation pressures for Japan’s overall PPI show a 7.6% gain over 12 months, accelerating to 12.7% at an annual rate over six months, and calming to a still-hot 4.5% over three months. For all-manufacturing, the 12-month gain is 7.7%, the six-month pace annualized is 12.4%, and the three-month pace annualized is 4.6%. These sequential results are very similar for these two series. Despite a substantial deceleration in place from 12 months to three months, the three-month pace is still hot, and the pace of the last two months is still at a troublesome 5% to 5.5%.

Japanese PPI data are available ahead of the CPI data. In the shaded columns of the table, we can compare PPI trends in the EMU and the U.S. through July, as well as Japan's own CPI trends.

These lagged comparisons show that PPI inflation in the European Monetary Union, while excessive over 12 months and six months, somewhat like Japan, has shown a sharper deceleration over three months. In the U.S., finished goods PPI inflation shows somewhat more tempered overall performance compared to Japan, but the just-released August data have turned hot again. The global PPI picture is not reassuring.

However, Japan's CPI, which is the more important reading for central bank attention, shows inflation at 2% over 12 months, rising to a 3% pace over six months and to a 4.4% annualized rate over three months. Japan’s core inflation similarly registers as an expansion of about 1.5% over six months and 12 months but logs a 2.8% increase over three months. Inflation remains restless.

Brent oil prices declined in August, but in spot markets oil is back over $100 a barrel, so it's not clear that we should view August, or the three-month trends, as good news. The Strait of Hormuz continues to be adversely affected. While some oil is getting out, clearly not enough is in circulation to calm world oil markets. In addition, there's a lot of concern about what's going to happen to LNG supplies as winter approaches and LNG is used for heating fuels, particularly in Europe.

Quarter-to-date inflation shows hot numbers for Japan's overall PPI and all of manufacturing. Running at a pace of about 6% in the quarter, there's not much that's reassuring despite the fact that there is a step-down of inflation in August. And will the August ‘print’ even be sustained?

The right-hand column shows the correlation between the price measures in the stub of the table at the left and oil prices. Japan's PPI has positive correlations of about 0.4 with Brent; the European Monetary Union has a PPI correlation of about 0.55. In the U.S., the PPI finished goods index has a correlation of about 0.4. However, in Japan, the CPI has a negative correlation of about -0.2 to -0.4.

The Bank of Japan has been on a bit of a hot spot as its inflation numbers have run on the hot side for the measures that it focuses on the most. The yen has been weak, and there have been U.S. and Japan operations sporadically to try to support the yen and keep it from continuing to slide. Some of the intervention monies that have been spent have been extremely large. One issue in Japan is an unexpected step-up in fiscal spending by the relatively new Takaichi government that has staked out a need to invest and modernize Japan’s industry to cement future competitiveness. Still, oil prices and foreign exchange values loom large in terms of gauging inflation and monetary responses in Japan. Fiscal spending also has markets on their back foot worried about excess spending. We are looking to upcoming U.S. Federal Reserve and Bank of Japan meetings in the week ahead. With a new U.S. CPI released, it's going to be harder for the Federal Reserve to hold its line on interest rates because inflation is excessive; it is not stepping down, and it may be stepping up its pace. On top of that, the Fed has to decide how it wants to deal with increasingly unruly energy prices.

The U.S. situation is complicated by being involved in an unpopular war with midterm elections coming, having a president who's looking to pull out any stops he can to improve his popularity, at a time that he appears to be stuck in a war that's unpopular and that unpopular war is also priming inflation by causing economic assessments to become increasingly dour. The U.S. conflict with Iran will determine the fate of the Strait of Hormuz and oil price developments globally for the foreseeable future. It is a particularly difficult time for policy in the U.S. At the same time, the U.S. has been doing whatever it can to help Japan control its slippery weak exchange rate because controlling that rate is also in U.S. interests.