Economy in Brief

Inflation in the UK continues to cook hot. In October, the CPIH rose by 1.6% month-to-month, a strong acceleration from the 0.4% gain in September and the 0.3% rise in August. The CPIH core, which excludes energy, food, alcohol, and tobacco, rose by 0.5% after a 0.4% gain in September and a light 0.5% gain in August.

Sequential inflation Sequentially the CPIH is still running extremely hot; the gauge is up by 9.6% over 12-months, it steps back to an 8.8% annual rate over 6-months and then it accelerates to a 9.4% annual rate over 3-months, nearly the same as it's hot 12-month pace. The core CPIH is up by 5.8% over 12-months, that dials back to 5.2% at an annual rate over 6-months then surges to a 5.9% annual rate over 3-months that pace exceeds even the 12-month pace. Both the headline and the core continue to give the UK authorities hot inflation readings indicating that there is more work to be done on the inflation front in the UK.

Breadth of inflation monthly The inflation rate had moderated, reducing the breadth of its gains, in September and August. In September inflation accelerated only about 45% of the categories; in August breadth was at 54.5%. These both represent middling breadth in terms of inflation. However, in October, the breadth of inflation (diffusion) is at 90.9% indicating that inflation is accelerating in almost every single category and is not succumbing to the narrowing spread indicated in September's result.

Sequential inflation breadth Sequentially the diffusion has varied to some extent; over 12-months diffusion is strong with an 81.8% value indicating inflation accelerates in all but about 20% of the categories compared to its pace of 12-months ago. Over 6-months, the breadth steps back to 45.5%, indicating that there's slightly more slowdown of inflation over 6-months then there is acceleration compared to the trend over 12-months. But, over 3 months, diffusion is back at a strong reading of 72.7%, indicating that inflation is accelerating in most categories compared to its 6-month pace.

Sequential inflation's breadth by categories Sequentially there's only one category that shows a persistence of deceleration in inflation; that's transportation, there the inflation rate is up by 9.3% over 12-months, up at a 4.9% pace over 6-months and then declines at a 7.6% annual rate over 3-months. On the other hand, sequentially inflation is accelerating in healthcare and in restaurants and hotels.

Breadth over the last 3-months Looking at inflation over the last 3-months - taking each month as an individual vector of observations - there's no industry that has inflation persistently accelerating or decelerating on that timeline. There's a lot of mixture in the inflation rate although; the commonality is that inflation is generally high and too high.

The chart shows big picture trends topping but not so much declining The chart for the CPIH inflation rate underscores these statistics. I have plotted the sequential rates of change for the CPIH core. These show that inflation has accelerated and then, in recent months, it has vacillated bobbing up and down and currently runs at a pace somewhere in the midst of this recent zone where inflation has been more or less contained. Twelve-month inflation obviously lags the most and it shows the most trend gain still in play, while 3-month and 6-month inflation show inflation has broken lower and has begun to vacillate in a somewhat lower region. All of this suggests that inflation may have seen its peak but there's nothing here to suggest that inflation is ready to move to lower levels to appease the desires of the central bank.

The unbearable fact of stuck, high, inflation Looking at the inflation rate over the last 3-months, in fact, inflation is intolerably high most everywhere apart from the decline in prices in the transportation sector and the increase at a 1% pace in communications. Communications is a tech category, that chronically tends to run a lower inflation rate. After those two industries, inflation in education reaches a 4.2% pace, recreation and culture reaches a 6.3% pace along with miscellaneous goods and services. Price pressures go up from there. Food prices are rising at a 20.6% annual rate, housing and household expenditure items see inflation at a 17.3% annual rate, and for health care inflation is at a 12% annual rate with restaurant and hotel prices gaining an 11.9% annual rate right on their heels. There's nothing in the distribution of these increases- over 3-months - that gives us reason to believe that inflation is simmering down.

But, 'stuck' also means not accelerating The most encouraging news from the CPI H core is that over 3-months the inflation rate's 5.9% pace is close to the year-over-year pace of 5.8% even though it's accelerating from 5.2% over 6-months. The clustering of these inflation rates around the 5%-6% level is encouraging, especially in view of some of the very high inflation rates we see prevalent within the body of this report. Sometimes the 'good news' is still not 'great news.'

GDP in Japan fell by 1.2% at an annual rate the third quarter after rising 4.6% at an annual rate in the second quarter. Year-over-year growth in GDP still progressed, rising to 1.9% in the third quarter compared to a year-over-year gain of 1.6% in the second quarter. The year-over-year calculation benefits from a data quirk that finds the third quarter one year ago simply much weaker than this third quarter in 2022. The effect of that is to cause year-on-year growth to benefit despite the growth slide in Q3 of 2022 – even though that seems counter-intuitive. It is counter-intuitive, but it is also arithmetic. The change in the year-over-year growth is being driven by the shift in the base period much more than the new data release of today.

Quarter-to-quarter growth Private consumption slowed sharply in the third quarter from a 5.1% annualized quarterly rate from a 1.1% rate in the third quarter. Public consumption also slowed from a 3.4% annual rate of expansion in Q2 to being flat in Q3. The slowdown with consumption spans both the private sector and the public sector at the same time and both slowdowns were quite significant. Fixed capital formation also slowed, falling to a 4.8% annual rate pace in the third quarter from a 6% pace the quarter before plant and equipment spending slowed its 6.3% pace from a 9.9% annual rate the quarter before. Housing contracted, falling at 1.7% annual rate but that was actually an improvement from a 7.4% annual rate fall in the second quarter.

On the trade front, exports improved to a 7.9% annual rate of growth after a 7.2% growth rate in the second quarter; imports however had only grown by 3.3% at an annual rate in the second quarter but surged, gaining 22.6% at an annual rate, in the third quarter helping to drive the trade account into deficit.

Domestic demand in Japan slowed to 1.4% annual rate from a 3.9% pace in the second quarter.

The quarter-to-quarter slowing of the economy is pervasive with slowing in most of the categories, exports are an exception and housing is another exception; although housing investment declined it declined by less than it had in the second quarter. Consumption was especially weak in the third quarter- Domestic demand slowed yet imports surged by 22.6% at an annual rate, a sharp increase in import demand particularly with domestic demand slowing.

Year-over-year data quirks drive an improvement The picture from year-over-year growth in Japan is quite different from the quarter-to-quarter results. Most categories in GDP show stronger growth in Q3 than in Q2 on a year-over-year basis. Looking at year-over-year growth, the consumption picture is mixed with private sector consumption speeding up to a 4.3% pace from a 3% pace. The second quarter saw public sector consumption slowing to 0.9% pace from a 2.1% pace in Q2.

Capital spending picks up the third quarter compared to the second quarter on a year-over-year basis: gross capital formation rises by 0.9% after falling 2.8% in the second quarter; plant and equipment spending rises at a 4.2% annual rate after edging ahead by just 0.2% year-over-year in the second quarter. Housing declines in the third quarter falling at a 4.9% annual rate, but that's an improvement from the 6.2% annual decline in the second quarter continuing the theme of improved quarter-to-quarter performance in the year-over-year growth rates.

On the trade front exports expand at a 5.6% annual rate year-over-year after slipping to a 2.9% annual rate in the second quarter; imports rise even more strongly at a 10.6% annual rate after a 3.8% annual gain in the second quarter.

Domestic demand rises to 2.9% in Q3 after a 1.8% increase in the second quarter in the year-on-year framework

The year-on-year surprise Year-over-year results are somewhat curious since the base for the third quarter year-on-year calculation gets weaker, the year over year numbers improve instead of decay. The reason for that is the base of these calculations which is the third quarter of 2021 saw extreme weakness in GDP on a quarterly basis one year ago with GDP falling 2.5% in that quarter and other components are showing weakness as well. As a result, the weakness that is posted and Q3 of 2022 is actually less than the weakness that occurred a year ago and that drives the year-over-year growth rate stronger. In this case the year-over-year numbers are misleading in terms of what's going on with the economy even though we often prefer to look at year over year numbers as being smoother and more indicative than quarterly numbers. Not so this quarter in Japan…