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Inflation numbers set to diverge further

For quite some time now central bankers across the globe have been fighting a losing battle against deflationary forces, with the European Central Bank and Bank of Japan taking the most recent steps to try and put a floor under prices.

Their inability to prevent continued declines has raised the inevitable questions as to whether further experimental monetary policy is effective in dealing with the problems in the local economy.

This week we are more than likely to get further evidence of the results of the policy failure of these two central banks in attempting to push prices higher with the release of the latest inflation numbers for April in the EU and the latest GDP numbers for Japan.

Expectations for EU CPI are expected to decline further from 0% in March to -0.2% in April, as the euro area struggles with the combined effects of lower commodity prices and internal devaluations from countries like Spain where CPI is -1.2%, and where we haven’t seen a positive reading since May 2014. While prices in Germany were more positive in March the outlook remains negative for the April numbers, begging the question as to what purpose the ECB is trying to serve in mitigating something over which they have little or no control.

Japanese Q1 GDP is expected to rebound from the 0.3% contraction at the end of last year to post a modest expansion of 0.1%, but this remains a far cry from the 1.1% seen a year ago.

On the flip side of the coin there does appear to be some evidence that prices in the US and the UK are starting to rise again. The recent direction of travel for UK CPI has been on an upward glide patch since the lows of -0.1% in November last year, while US CPI has also managed to eke its way higher from its October levels of 0.2%.

That this has come at a time when both central banks have remained on the sidelines may or may not be a coincidence, but it is rather noteworthy that inflation does appear to be stirring in areas of the global economy where the respective central banks are being passive.

Expectations for UK CPI for April are for an unchanged reading of 0.5% though we could see an increase from 0.5% to 0.6%, while US CPI is expected to increase from 0.9% to 1.1%.

The rebound in commodity prices does appear to be helping along with fairly robust labour markets, and while wage growth is a little on the weak side it still remains above general underlying inflation levels.  

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