Inflation not cooling yet

After last week's data, we have a better picture of global inflation, and it looks as hot as -- if not hotter than -- it has been in recent years.

Friday's report from the United States Commerce Department showed that the personal consumption expenditures price index rose by 0.4 percent in January compared to a 0.3-percent rise in December. The rise in prices negated the rise in nominal consumer spending.

Excluding food and energy, prices rose by 0.3 percent in January. This was faster than the 0.2-percent pace of the preceding three months.




The data from the Commerce Department largely corroborated those from the Labor Department's consumer price index that showed that inflation in the US did not abate in January.

In fact, based on the 12-month rates of change, all the main measures of inflation in the US showed acceleration in January compared to December.

All except one. The PCE inflation rate excluding food and energy -- the measure of inflation that the Federal Reserve focuses on -- was unchanged at 2.2 percent. Incidentally, this measure also shows the lowest rate of inflation.

Elsewhere, the same trend in inflation shows up as well from the data reported last week.

In the euro area, Eurostat reported on Friday that the 12-month inflation rate accelerated to 3.2 percent in January from 3.1 percent in December. However, inflation was concentrated in energy and, to a smaller extent, in food. Consumer prices excluding energy, food, alcohol and tobacco rose at a 1.7-percent rate in January, down from the 1.9-percent rate in December.

Also on Friday, the Statistics Bureau of Japan reported an inflation rate of 0.7 percent in January. The core inflation rate excluding prices of fresh food was 0.8 percent. Both rates were unchanged compared with the previous month.

Over the longer term, however, there has clearly been a rising trend. Like elsewhere, energy has been the chief factor behind the rising prices. Excluding energy and food, consumer prices in Japan are in fact still falling, although even those prices are now flattening out.

It is clear from all the inflation reports that inflation around the world has largely been driven by energy. Crude oil hit US$103 in New York trading last week and has risen 69 percent from a year ago. That is likely to keep inflation from moderating in the immediate future.

Nevertheless, as I wrote last week (see "As economic growth weakens, look for inflation to moderate"), inflation is expected to moderate in both the US and Europe later in the year on the back of slower economic growth.

The US economy is already clearly slowing. Last week saw fourth quarter economic growth confirmed at 0.6 percent. With consumer spending flat and consumer sentiment deteriorating, it may be falling into recession next.

If the world's biggest economy stumbles, the rest of the world is likely to follow to some extent or other.

Already, confidence in Europe is waning. The European Commission reported last week that its Economic Sentiment Indicator for the European Union and the euro area fell by 3.1 points and 1.6 points in February to 100.2 and 100.1 respectively.

In Japan, manufacturing data is showing weakness. Industrial production fell 2.0 percent in January from December while the NTC Research/Nomura/JMMA Purchasing Managers Index fell to 50.8 in February from 52.3 in January.

If the trends persist, we may finally see a peak in inflation. At least until the next expansion cycle.