RPI masks divergence: inflation undershoots, activity overshoots

Global data on net are coming in right at expectations, at plus 1 and very near the zero line on Econoday’s Relative Performance Index. When excluding inflation, however, the index less prices (RPI-P) rises to 13 to indicate that inflation, on a global scale, is running cooler than expected and that real activity is running warmer than expected. A welcome combination.

After dramatically underestimating US payrolls at the beginning of the month, forecasters have improved their aim with this country’s RPI at 3 and the RPI-P at minus 1. Yet an extension of as-expected results could, in an irony of sorts, keep the outlook for Federal Reserve policy in a holding pattern.

In Canada, the recent recovery in RPI-P (now 26) was reflected in the Bank of Canada’s decision last week to revise up its GDP growth forecast for 2024 and leave policy on hold. However, with the RPI (8) much closer to zero, the implication is that inflation is still undershooting forecasts leaving financial markets still focused on the June policy announcement as the most likely time for a near-term ease.

The Eurozone data calendar was very light last week but with an RPI of minus 8 and an RPI-P of 11 going into their meeting, the European Central Bank probably felt confident about its decision to leave policy on hold. Inflation is undershooting expectations but the real economy is outperforming, limiting pressure for a cut before an increasingly likely move in June.

In the UK, overall economic activity continues to perform much as expected, reflected in an RPI of 1. However, the RPI-P (10) also still shows some upside bias to real economy surprises. This will ensure that Tuesday’s labour market report is as important to policy as Wednesday’s inflation update.

In Switzerland, last week’s data again showed economic activity lagging behind forecasts, as it has for much of the year to date. Most of the downside surprises remain confined to the inflation data – the RPI stands at minus 23 while the RPI-P is a less weak minus 8 – but the real economy is also underperforming. Accordingly, speculation about another cut in the Swiss National Bank’s policy rate at the end of the quarter continues to build.

In Japan, both the RPI (minus 1) and RPI-P (minus 5) remain (just) in negative surprise territory, providing no support for the ailing yen. A generally surprisingly soft economy continues to restrict the Bank of Japan’s scope to raise key interest rates which, with Fed easing speculation being pushed further out, leaves the Japanese currency looking decidedly vulnerable.

By contrast, in China, both the RPI (36) and RPI-P (70) show recent economic activity easily beating expectations but note that the sizeable gap between the two measures means prices are still falling short. Deflationary worries may have eased but they have not gone away.