Today we got the UK's inflation data for December, which found CPI up 5.4% yoy, on the back of a 0.5% mom rise which was 1.9SDs above historic seasonal trends. That 1.9SD deflection from trend is a sharp improvement from Nov's 3.8SD and Oct's 6.3SD deflections. But it's still grim enough, and means that we should expect to see inflation at just under 6% in 1Q, rising to 6.3% in 2Q, 6.7% in 3Q and 6.1% in 4Q.
Currently, UK 10yr yields are running at just 1.3%, so there's a 5.4pp gap between that and where we can expect 4Q inflation to be at. That's the scale of the challenge facing Bank of England. It is the biggest gap between bond yields and likely 4Q22 inflation of any major economy: in the US the gap is 3.5pps, in Eurozone 4.8pps, and in Japan 0.3pps, whilst there are still premia available in China 1.1pp and India 1.4pp.
The prospects for the rest of the developed world aren't as bad as for the UK. I construct a global CPI index using US, Eurozone, and NE Asia baskets. And the influence of NE Asia's relatively restrained inflation means that globally we've probably seen the peak of yoy CPIs in December at 4.5%, and we can expect to see this coming down very gently in the coming year, sinking to just under 4% toward the very end of 2022.
That's what happens if the current 6m deflection against trends are maintained. But now central banks are on the case, surely the current deflections will be moderated? Let's think about this.
There is good news. By December, the world had got the inflation message, with the result that this week, for the first time since the beginning of January last year, my shocks and surprises inflation index managed to lift itself into positive territory. Are we then 'learning to live with inflation'?
If so, this could be good news. But there is a catch: in both November and December, a series of factors combined to moderate inflation. Let's start with the dollar; in Nov it gained 0.6% against the SDR basket, and followed up in December with a further 0.4% rise. A rising dollar tends to be disinflationary, not least for commodity markets. And so, oil fell 7.6% mom in Dec and after falling 3.2% in Nov; natural gas prices dropped 23.8% in Dec after falling 8.4% in Nov; and the wider CRB index fell 3.9% in Dec after falling 0.3T% in Nov. These sharp falls in commodity prices made their impact in Dec's inflation results all around the world.
But this has not been sustained in January. In fact, the dollar is now falling against the SDR - an inflationary sign. And guess what? oil prices are up 11.5% on the month, natural gas prices are up 5.4% and the CRB index is up 5.9% on the month. So we should not get too excited that we're learning to live with inflation - more nasty inflation shocks could well be lurking in Jan and Feb results.
