2017 is seeing the return of the inflation monster

As we nearly reach the third month of 2017 we find ourselves observing a situation where an old friend is back although of course it is more accurate to describe it as an enemy. This is the return of consumer inflation which was dormant for a couple of years as it was pushed lower by falls particularly in the price of crude oil but also by other commodity prices. That windfall for western economies boosted real wages and led to gains in retail sales in the UK, Spain and Ireland in particular. Of course it was a bad period yet again for mainstream economists who listened to the chattering in the  Ivory Towers about “deflation” as they sung along to “the end of the world as we know it” by REM. Thus we found all sorts of downward spirals described for economies which ignored the fact that the oil price would eventually find a bottom and also the fact that it ignored the evidence from Japan which has seen 0% inflation for quite some time.

A quite different song was playing on here as I pointed out that in many places inflation had remained in the service-sector. Not many countries are as inflation prone as my own the UK but it rarely saw service-sector inflation dip below 2% but the Euro area for example had it at 1.2% a year ago in February 2016 when the headline was -0.2%, Looking into the detail there was confirmation of the energy price effect as it pulled the index down by 0.8%. Once the oil price stopped falling the whole picture changed and let us take a moment to mull how negative interest-rates and QE ( Quantitative Easing) bond buying influenced that? They simply did not. Now we were expecting the rise to come but quite what the ordinary person must think after all the deflation paranoia from the “deflation nutters” I do not know.


January saw quite a rise in consumer inflation in Spain if we look at the annual number and according to this morning’s release it carried on this month. Via Google Translate.

The leading indicator of the CPI puts its annual variation at 3.0% In February, the same as in January
The annual rate of the leading indicator of the HICP is 3.0%.

Just for clarity it is the HICP version which is the European standard which is called CPI in the UK. It can be like alphabetti spaghetti at times as the same letters get rearranged. We do not get a lot of detail but we have been told that the impact of the rise in electricity prices faded which means something else took its place in the annual rate. Also we got some hints as to what is coming over the horizon from last week’s producer price data.

The annual rate of the General Industrial Price Index (IPRI) for the month of January is 7.5%, more than four and a half points higher than in December and the highest since July 2011.

It would appear that the rises in energy prices affected businesses as much as they did domestic consumers.

Energy, whose annual variation stands at 26.6%, more than 18 points above that of December and the highest since July 2008. In this evolution, Prices of Production, transportation and distribution of electrical energy and Oil Refining,
Compared to the declines recorded in January 2016.

In fact the rise seen is mostly a result of rising commodity prices as we see below.

Behavior is a consequence of the rise in prices of Product Manufacturing Basic iron and steel and ferroalloys and the production of basic chemicals, Nitrogen compounds, fertilizers, plastics and synthetic rubber in primary forms.

The Euro will have had a small impact too as it is a little over 3% lower versus the US Dollar than it was a year ago.


The land of beer and chocolate has also been seeing something of an inflationary episode.

Belgium’s inflation rate based on the European harmonised index of consumer prices was running at 3.1% in January compared to 2.2% in December.

The drivers were mostly rather familiar.

The sub-indices with the largest upward effect on inflation were domestic heating oil, motor fuels, electricity, telecommunication and tobacco.

These two are the inflation outliers at this stage but the chart below shows a more general trend in the major economies of the Euro area.

The United States

In the middle of this month the US Bureau of Labor Statistics confirmed the trend.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent in January on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics
reported today. Over the last 12 months, the all items index rose 2.5 percent before seasonal adjustment.

This poses some questions of its own in the way that it confirmed that the strong US Dollar had not in fact protected the US economy from inflation all that much. The detail was as you might expect.

The January increase was the largest seasonally adjusted all items increase since February 2013. A sharp rise in the gasoline index accounted for nearly half the increase,


A currency plummet of the sort seen by the Egyptian Pound has led to this being reported by Arab News.

Inflation reached almost 30 percent in January, up 5 percent over the previous month, driven by the floatation of the Egyptian pound and slashing of fuel subsidies enacted by President Abdel-Fattah El-Sisi in November.

Ouch although of course central bankers will say “move along now……nothing to see here” after observing that the major drivers are what they call non-core.

Food and drinks have seen some of the largest increases, costing nearly 40 percent more since the floatation, figures from the statistics agency show. Some meat prices have leaped nearly 50 percent.


There is much to consider here and inflation is indeed back in the style of Arnold Schwarzenegger. However some care is needed as it will be driven at first by the oil price and the annual effect of that will fade as 2017 progresses. What I mean by that is that if we look back to 2016 the price of Brent Crude oil fell below US $30 per barrel in mid-January and then rose so if the oil price remains around here then its inflationary impact will fade.

However even a burst of moderate inflation will pose problems as we look at real wages and real returns for savers. If we look at the Euro area with its -0.4% official ECB deposit rate and wide range of negative bond yields there is an obvious crunch coming. It poses a particular problem for those rushing to buy the German 2 year bond as with a yield of 0.94% then they are facing a real loss of around 5/6% if it is held to maturity. You must be pretty desperate and/or afraid to do that don’t you think?

Meanwhile so far Japan seems immune to this, of course there will eventually be an impact but it is a reminder of how different it really is from us.

UK National Statistician John Pullinger

Thank you to John and to the Royal Statistical Society for his speech on Friday on the planned changes to UK inflation measurement next month. Sadly it looks as if he intends to continue with the use of alternative facts in inflation measurement by the use of rents to measure owner-occupied housing costs. These rents have to be imputed because they do not actually  exist as opposed to house prices and mortgage costs which not only exist in the real world but are also widely understood.

Egypt is suffering from both the lower oil price and the currency wars

Today I intend to take a trip to a country which has a rich history. There are of course the Pyramids for starters but also the city of Alexandria which has been described thus in the Guardian today.

“Alexandria was the greatest mental crucible the world has ever known,” claim Justin Pollard and Howard Reid, authors of a book on the city’s origins. “In these halls the true foundations of the modern world were laid – not in stone, but in ideas.”

The lighthouse,library and museum went on to achieve great fame but the man whom it was all named after never lived to see it as Alexander the Great went off on other campaigns and met his own demise. However this rich history is clashing with a very troubled present as the groundswell of the Arab spring meet a lower oil price and both actual terrorism and the fear of it impact.

The Egyptian Pound

This morning’s news comes to us from Arab Economic News.

The Egyptian central bank devalued the pound by almost 13 percent at an “exceptional” sale of dollars on Monday.

The central bank said it sold $198.1 million to local lenders at 8.85 pounds per dollar. That compares with a previous exchange rate of 7.73 pounds. It wasn’t immediately clear whether the lower price is just limited to Monday’s dollar sale. Central bank officials weren’t immediately available for comment.

I do like the idea that you could devalue just for one day! Especially as we are immediately given a clue as to why this has happened.

Egypt is grappling with a dollar squeeze that is threatening economic growth in the most populous Arab country. Foreign-currency reserves have tumbled by more than 50 percent since 2011, though they have stabilized at just over $16 billion in the past six months.

When a country sees a rush for US Dollars that is invariably a sign of what Taylor Swift would call “trouble,trouble,trouble” and can end up in the sort of situation I have described in the past in Ukraine were it becomes a parallel currency for some anyway.If we return to the foreign reserves situation we see another familiar tale as Reuters take up the story.

Egypt’s reserves have dropped from $36 billion in 2011 to $16.53 billion at the end of February.

Over this time the currency has been falling as @RtrsAgAnalyst points out.

As you can see the period after the Arab Spring has seen both currency declines and foreign exchange reserve falls in a familiar pattern for a fixed exchange rate. According to Renaissance Capital it had the most overvalued currency in real terms of any of the Emerging Markets. That is no doubt related to pegging your currency against the strong US Dollar. In a way this from Gerry Rice of the International Monetary Fund in January confirms this.

We would like to stress the need to raise exports in order to promote growth and for exchange rate flexibility to support this, allowing the exchange rate to move to a market clearing rate where supply meets demand, would boost exports, and prevent foreign exchange shortages.

Those who have followed the disastrous policies the same IMF has applied to Greece may reasonably be wondering why a “market clearing (exchange) rate has been denied to it? Perhaps it might provide an antidote to the usually sycophantic media coverage of its Managing Director Christine Lagarde if style could be replaced by substance. After all the quote about is a clear critique and indictment of IMF policy in Greece.

Why are devaluations invariably too late?

I think that there are three major reasons for this. The first is that establishments and what are considered to be elites tend to be much less intelligent than they think they are. Secondly reality is rarely a friend of theirs. Thirdly and interrelated to all this is that they usually try to get their own money out first! In a way this news from China from Saturday highlights this. From Bloomberg.

China is tightening restrictions on the use of third-party payment providers to buy insurance products in Hong Kong as authorities move to stem outflows of the yuan.

I am sure we will find investment elements in these products as we note how inventive people can be. Personally I believe that sometimes the authorities are slow to close down such channels – after all some US $1 Trillion has reported fled China in the last year -because they want a slice of the pie!

The economy

Last September the IMF pointed out that it was not all bad news.

Macroeconomic figures also point to some improvement, with growth rebounding to 4.2 percent in 2014/15, and inflation has declined.

However we feel a chill down our spines as we see the word “resilience” applied to the banking sector as that usually means it is either going to need it or a bailout will be required. Also at a time of political disquiet we are reminded of “trouble,trouble,trouble” again.

At the same time, unemployment remains high notably among the youth

Only six months before Christine Lagarde had pointed out this.

Over the coming five years, there will be more than 600,000 new entrants to the labor market per year.

Have you noticed how according to the world establishment both growing and shrinking workforces are a bad idea?! Poor old Goldilocks never seems to have her porridge just right or in IMF speak.

This is a moment of opportunity.

For those of you wondering things are not as bad a being “on track”. Although perhaps the IMF will inform us as to how raising taxes such as introducing the same VAT which has cause so much economic pain in Greece will help the poor in Egypt.

What now?

The currency controls imposed a year ago had created a bit of a crunch on the economy according to Reuters.

At the same time, the central bank lifted caps on withdrawals and deposits of foreign currencies for individuals and companies importing essential goods, easing forex controls imposed a year ago that had all but paralysed trade……..Businesses who saw a devaluation as inevitable were holding back on investment.

Also there is the issue of lower receipts from tourism as the impact of the Russian plane crash in Sinai and as we mull lower figures for the Baltic Dry Index this consequence from the Middle East Monitor.

a decline in revenue from the Suez Canal

The latest economic growth numbers showed 4.5% but they are from the middle of last year and with the workforce growth we note that per capita growth will be less. Any slowing will only reduce progress on that front and reinforce Egypt’s long-standing problems with poverty and inequality. As to interest-rates some 15% is being offered to investors today on some 3 year bills as long as you can provide some foreign exchange and inflation is 9.1%. For a description of that mixture let me hand you over to Ms. Britney Spears.

Don’t you know that you’re toxic


Any economic woe poses its own problem in a country that is already so troubled. For example lawmakers have accused the European Parliament of being influenced by the Muslim Brotherhood which as far as I know not even Nigel Farage accuses them of. Meanwhile the economy is one of those being affected by the lower oil price as the US EIA indirectly highlights.

Egypt is the largest non-OPEC oil producer in Africa and the second-largest dry natural gas producer on the continent.

Also Egypt has relied on loans from Saudi Arabia and the United Arab Emirates to finance its balance of payments problems and such funds must be in shorter supply. Add the issues described above and 2016 will be hard going especially as the troubles have seen falling gas production in spite of new fields being found.

On the upside there is this from the IMF research although of course it is not clear how this can coexist with the spread of fundamental Islam.

For instance, Aguirre and others (2012) suggest that raising female labor force participation to country-specific male levels would boost GDP in the United States by 5 percent,
in Japan by 9 percent, in the United Arab Emirates by 12 percent, and in Egypt by 34 percent.

Oh and who always benefits from establishment moves?

Commercial International Bank surged 7.0 percent and investment bank EFG Hermes jumped 9.9 percent. Real estate developers Egyptian Resorts and Talaat Mostafa Group each climbed more than 8.0 percent. (Reuters)