Charts of the Week: Back to Inflation

The growth consensus versus the inflation consensus The August Blue Chip survey of Economic Indicators suggested that forecasters’ growth expectations have been shaped by their inflation expectations over the past 6 months. Upward revisions to their outlook for GDP growth in 2024 have typically coincided with downward revisions to their outlook for inflation, for example, and vice versa. That said, the forecasts revisions that have been made to the outlook for several economies deviate from these norms. Big positive growth revisions have accompanied positive inflation revisions in the US, for example. A large upward revision to the growth outlook for India is additionally of note relative to the much smaller downward revision to the outlook for inflation (chart 1).

The GDP consensus for the US versus Japan That aforementioned improvement in forecasters’ growth expectations for the US also stands in vivid contrast to the deterioration in their expectations for Japan. As chart 2 below suggests, US growth expectations for 2024 have, on the whole, been rising since the turn of this year, while growth forecasts for Japan have been falling. That widening differential in growth expectations, however, now stands in contrast to the recent narrowing of short-term interest differentials between the US and Japan. Other factors, such as the current calibration of monetary policy (i.e. tight in the US and loose in Japan) coupled with the inflation outlook are at the root of this anomaly. Even so, this could be magnifying investors’ uncertainty about how the economic outlook and, more specifically, about how some further unwinding of Japan’s carry trade might invoke financial instability in the coming weeks.

Japan’s economy All that aside the latest Q2 GDP data for Japan were stronger than expected and now suggest some upside risks to the overall outlook for 2024. However, the Japanese economy still contracted on a y/y basis, specifically by 0.8%. Unlike previous quarters, Q2’s y/y growth was not fuelled by net exports, which instead became a drag on growth. On the other hand, private consumption, which had been weighing on activity, elicited some signs of improvement. This positive shift in consumption will be noted by the Bank of Japan given its focus on generating a virtuous cycle from real wage growth to spending.

US inflation As for the US, this week’s inflation data will have reinforced the idea that the Fed will kick start an easing campaign in September. July’s CPI data, for example, revealed a further moderation in headline and core CPI inflation and – even more notably – a further slowdown in service sector inflation. The latter was arguably foreshadowed by some of the underlying details from July’s NFIB survey, and, for instance, a lower inclination from the small company sector to lift wages. Fed policymakers will have been comforted too by the latest survey from its New York branch indicating a big drop in 3-year ahead inflation expectations (chart 3).

UK inflation This week’s raft of UK economic data additionally contained some inflation-friendly messages. UK services CPI inflation, for instance, fell sharply in July, to 5.2% y/y from 5.7% in June. That chimed too with latest labour market data revealing that wage pressures have been ebbing. Average earnings growth specifically slowed to 4.5% in the 3 months to June compared with a year ago.

Airport Traffic Finally, and with a broader European focus, chart 6 below illustrates some positive data concerning airport passenger numbers at some selected airports. Specifically, the major airports in London, Madrid and Frankfurt have seen passenger numbers in July climb to their highest levels since immediately prior to the pandemic in Q4 2019. This chimes with a number of other data points – including the path for inflation – that indicate that a post-COVID normalisation phase in the world economy could now be finally over.