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Situation

• On a monthly basis Consumer prices rose by 0.24 % (0.63 % in Apr’07)
• On an annual basis Consumer prices rose by  1.87 % p.a ( 1.91% p.a in Apr’07)
• On an monthly basis Core Consumer prices - EFAT ( Ex Energy, Food , Alchohol and Tobbaco ) rose by  0.17 % p.a ( 0.53 % p.a in Apr’07)
• On an annual basis Core Consumer prices ( EFAT) rose by  1.94% p.a ( 1.90 % p.a in Apr’07)

Background

1. Oil prices have risen by 6.29% on an average in Jun’07 (over May’07). This cause Core CPI ( ex Energy) to start rising.
2. The European Commercial bank ( ECB) aims at inflation ( CPI ) rates of below, but close to, 2% over the medium term. The ECB in its meeting on Jun’07 further raised the bank rate by 0.25 bais points to 4.00%.
3. European GDP has been expanding in Q1 2007
4. The ECB has a monetary Policy meeting on July 5th 2007

6. Core Consumer Prices ( EFAT and ex- Energy ) viz bank rate ( click on image for a better Visual)

While CPI ( ex- EFAT) has been dropping on the interest rate hikes , CPI ( ex- Energy) remains on a rising trend.

i.e it is the drop in energy prices that has assisted the drop in ex-EFAT

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7. CPI viz PPI (click on image for a better Visual)

Producer prices ( PPI) remains in a downward trend - and could indicate that CPI may not rise much further in the immediate future

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Conclusion

Core CPI - EFAT has been dropping mainly due to drop in energy prices in the early part of the year

It can be expected that the recent rise in energy prices will cause CPI (EFAT)  to start rising and thereby have an effect on CPI ( ex- Energy) to rise further

This will be a major concern in the ECB - Monetary Policy meeting on July 5th 2007. The currency market has discounted a possibbility of a hike already ( Euro risen from 1.33 to 1.36 to the US $)

In the longer term the ECB is getting closer to pausing as its eight interest rate hikes since 2005 start to weigh on the euro zone growth.

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Related links

• Euro area - Core inflation ( CPI ) growth at its highest since Jun’04
• UK : Inflation ( CPI and PPI ) drops in May’07
• Japan - Inflation indices ( CPI ) deflate in Mar’07
• India - marginal drop in inflation ( CPI )

• USA - Inflation (specially core) faces a rising risk
• Europe - Producer Prices in Apr’07 rise at its slowest pace since Jul’04
• Japan - Producer prices rise in Apr’07

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Situation in May’07

• On a monthly basis Consumer prices rose by 0.29 % (0.29 % in Apr’07)
• On an annual basis Consumer prices rose by  2.54 % p.a ( 2.75 % p.a in Apr’07)

• On a monthly basis Producer prices rose by 0.40 % (0.50 % in Apr’07)
• On an annual basis Producer prices rose by 2.46 % p.a ( 2.47 % p.a in Apr ’07)

• On an monthly basis Core Producer prices remained flat ( 0.20 % p.a in Apr’07)
• On an annual basis Core Producer prices rose by  2.43 % p.a ( 2.43 % p.a in Apr’07)

Background

• Both  CPI and PPI ( including core PPI) have been dropping for the past 2 months
• The Bank of England ( BOE) voted to raise the official Bank Rate paid on commercial bank reserves by 0.25 percentage points to 5.5% during their May meeting.
• The Bank of England’s inflation target is 2%. This is expressed in terms of an annual rate of inflation based on the Consumer Prices Index (CPI).
• Inflation growth was at a record high in Mar’07

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Core PPI ( click on image for the better Visual)

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PPI ( click on image for the better Visual)

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CPI ( click on image for the better Visual)

Conclusions

The series of rate hikes since June’06 have started taking effect

• The rate hikes from June’06 seems to have capped core PPI. Core PPI looks like moving to a sub 2.00% p.a towards end ‘07.
• PPI looks like retaining a 2.00% p.a - 2.9% p.a range till Sept ‘07. After this a drop to 2.00% p.a towards early 2008 can be expected
• CPI can be expected to drop to 2.0% p.a towards end’07. After this it is likely to range between 2.00 % p.a - 3.00 % p.a till mid’08.

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The Bank of England has a Monetary Policy meeting on July 5th 2007. The market is expecting one more rate hike towards 5.75% ( from the current 5.50%).

This is because while inflation has come down in the past two months , there is a fear that manufacturers could utilise the strong demand to regain pricing power (creating medium term inflation). The GDP has continued to grow strongly in Q1 2007.

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Related links

• UK - PPI Producer prices drop in Apr’07
• USA - Inflation (specially core) faces a rising risk
• Europe - Producer Prices in Apr’07 rise at its slowest pace since Jul’04
• Japan - Producer prices rise in Apr’07

• UK Inflation (CPI) drops in Apr’07
• Euro area - Core inflation ( CPI ) growth at its highest since Jun’04
• Japan - Inflation indices ( CPI ) deflate in Mar’07
• India - marginal drop in inflation ( CPI )

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Situation

Fiscal deficit for the month of May’07 stood at -67.69 bn $

Fiscal deficit as a % of Real GDP stood at - 6.18% at the end of Q1 2007 ( Q1 always tends to have the worst fiscal situation as a % of GDP)

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Background ( click on image for a larger visual)

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Conclusion ( click on image for a larger visual)

• Q2 always tends to have the best fiscal situation (Q2 for both 2005 and 2006 were at a fiscal surplus)
• We can expect the surplus as a % of GDP to be to be towards a 4.50% for Q2 2007.

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Related links

• USA - Record fiscal surplus in Apr’07 (highest since Apr’01)
• USA - Q1 2007 GDP annual growth revised to a lower level (lowest since 2003 Q3)
• USA - Relationship between Fiscal Deficit and Savings rate ( since 1981 )
• USA - Relationship between GDP and Savings rate ( Quarterly data since 1985 )
• USA - Fiscal situation as a percentage of GDP, under the recent four Presidencies ( since 1980 )
• USA - Manner in which the Deficit has been financed since 1995 ( Savings viz external debt)

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