Japan’s PPI Breaks Lower, Following the International Script

Japan's producer price index fell by 0.4% in May after turning up a flat performance in April and a flat performance in March. For all manufacturing, the PPI rose by 0.1% in May after rising by 0.2% in April and by 0.3% in March; the progression to smaller increases is in train month-to-month for manufacturing even if its broader progression is blunted.

PPI progression The progression from 12-months to 6-months to 3-months finds Japan’s PPI up at a 5.1% annual rate over 12 months and at a 0.5% annual rate over 6 months; then it falls at a 1.7% annual rate over 3 months. Japan's manufacturing PPI rises 4.5% over 12 months, then decelerates to a 2.4% annual rate over 6 months as well as over 3 months.
Global PPI disinflation is in gear...so what? Referencing the chart at the top, we can see that this tendency for the PPI to have run hot and then to decelerate sharply is part of an international phenomenon and one that seems to be strongly linked to energy prices (see the correlations to Brent in the table – not the CPI exception). The chart looks at year-over-year percent changes in various PPIs and plots them against the Brent price level that is chronicled on the left scale of a two-scale chart above. But it is not driving the trends central bankers care most about.

The PPI is NOT the index favored by central bankers For producer prices, raw materials, energy, commodities, agricultural goods - all these things - are extremely important. After energy prices had flared along with other commodity prices, they decelerated and this is having a global impact on producer prices; in fact, producer prices are falling much faster than consumer prices - the price indexes that central banks typically look at to set monetary policy.

Consumer prices rule! In the U.S., in Europe, and in the U.K., consumer price gains have long been too high, and they have continued to be stubborn, resistant to slowing enough in the face of these severe drops in producer prices. Markets, to some extent, are confused because, in the past, producer prices have been reasonable harbingers of consumer prices, but we also know that producer prices yield exaggerations of the moves to come from consumer prices. Even in Japan, consumer prices now are failing to show the kind of slowing outside of energy and food prices that the central bank had been expecting. Japan's inflation ‘problem’ is not as bad as the rest of the world. But Japan’s consumer prices are overshooting the Bank of Japan target. The BOJ has been arguing that the rise in inflation is temporary; the central bank has, for the most part, been ignoring it. But maybe now there's something percolating in the price index that Japan is going to have to pay some attention to. Japan may be in the process of becoming less of an exception.

Brent is still an inflation moderator The table still shows that energy is a negative factor, as Brent prices decline 11.5% month-to-month in May after having increased 2.7% in April and fallen 4.8% in March. There is no pent-up pressure coming from oil prices according to Brent. Sequentially Brent price changes are also still negative.

Global trends compared and contrasted Japan gives us the first inflation observation from May; for other countries we're looking at data up-to-date through April: for the European Monetary Union and for the U.S. and in comparison with Japan's own CPI. We can look at the sequential price trends and there we see U.S. and European PPIs showing decelerations from 12-months to 6-months to 3-months. Japan's CPI also shows decelerations from 12-months to 6-months to 3-months. But Japan’s CPI core shows an acceleration from 12-months to 6-months to 3-months. For comparison, I also reoffer Japan’s PPI on a one-month lag basis so we can compare it to the other indexes on the same, albeit less topical, timeline. On that basis, Japan's overall PPI still shows steady deceleration, but the manufacturing gauge shows the deceleration from 12-months to 6-months and then from 6-months to 3-months a very slight pickup: from 3.3% at an annual rate over 6 months to 3.5% at an annualized rate over 3 months. As far as comparisons go, it is hair splitting to call that ‘acceleration.’

The policy framework On balance, Japanese prices are still weak in May. However, producer prices have been weak and so this is not a change from anything that we've seen in Japan or in the global economy. For the sake of policy, we want to wait and see what the CPI's are doing and because of the role of energy and commodities we're not just looking at CPI headlines; we are looking at core CPIs - that is the CPI excluding energy and food prices. On that score, there still is a good deal of inflation and of inflation stubbornness globally. And, on that score, Japan is beginning to fall into line showing CPI-sluggishness instead of being a special case.