Over the next couple of months, we want to keep an eye on inflation numbers. Why? Well, there are two competing theories about what’s going to happen with the massive amount of stimulus that’s being put into financial markets to deal with the effects of the lockdown.
In this regard, the UK and Canada are interesting cases. This is because we expect lockdown measures there will last longer.
What are those Theories?
The traditional perspective is that when the money printer switches on, inflation goes up. When there is less economy and more money, that money is worthless.
The competing theory comes from an unorthodox, post-GFC perspective: that persistently low-interest rates slow the velocity of money, leading to deflation. Basically, what’s been happening in Japan, and in Europe since 2011.
Both scenarios have diametrically opposite impacts on the currency, potentially. So, we want to pay attention to the early signs we might see in inflation numbers.
The UK and Canada both had relatively stable monetary policies in the lead up to the coronavirus outbreak. Therefore, a change in CPI rates is likely to be more “clean”. That is, attributable to the economic impact of the pandemic.
What we are Looking For
First of all, the UK reports early in tomorrow’s trading session. There is a lot of data coming out at once, but the one that usually grabs the market’s attention is the Core CPI monthly change. This is expected to come in at 0.3%, a slight slowing of the pace from 0.6% in February. We should remember that inflation took an excursion higher as there were rumors of potential supply chain problems.
CPI (the unadjusted figure) is forecast at 0.2% – halving the pace from 0.4%. Harmonized CPI isn’t as important since the UK left the EU. However, it might be of interest to those who the GBPEUR cross. It is also expected to decline.
Similarly in Canada, it’s the core CPI monthly change that gets most of the attention. The figure is forecast to fall to 0.3% from 0.7% prior. This would bring the inflation rate back within the normal range.
Annualized CPI is expected to remain stable at 1.8% and just off of the BOC’s target. Unadjusted CPI is projected to accelerate slightly to 0.5% compared to 0.4%.
The massive drop in oil prices likely had an unbalanced impact on Canada, since most production is concentrated in the West, and is exported to the US. Meanwhile, the majority of people live in the East, which is dependent on oil imports.
There is some evident expectation for inflation data to be distorted by the closing of a significant portion of retail outlets. Panic buying ahead of the lockdowns produced some transitory scarcity. This could also lead to a broader spread between CPI and CPI core figures.
Generally, lower crude prices are understood to translate to lower inflation as energy and transportation costs fall. However, this might be offset by the change in demand as production facilities shut down; businesses can’t benefit from lower oil prices if they aren’t working.