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UK Inflation and Japan's exports growth

UK inflation surges to a 10-year high of 4.2%, worse than expected. The cost of living in the U.K. surged in October to a 10-year high, with the figure now more than double the target set by the Bank of England. The U.K.’s Consumer Prices Index rose by 4.2% in the 12 months to October 2021, up from 3.1% in September. Economists polled by Reuters had expected a figure of 3.9% for October. The Bank of England held interest rates steady earlier this month, defying many investors’ expectations that it would become the first major central bank to hike rates following the coronavirus pandemic, reports CNBC.

Analyst’s View

The UK consumer prices rose at a stronger pace in Oct-21 as the headline CPI inflation went up by +4.2%yoy (Sep-21: +3.1%yoy), the sharpest rise since Dec-11. The Oct-21 inflation rate surpassed the market consensus (3.9%yoy) and remained well above the Bank of England’s target of 2% for the year.

The faster inflation was bolstered by the rising housing and utility costs (+6.8%yoy; Sep-21: +1.9%yoy), attributed to the increase in the energy price cap by the Office of Gas and Electricity Markets (Ofgem), in line with the soaring global energy prices. Furthermore, the government’s decision to raise the VAT from 5% to 12.5% in the hospitality sector resulted in higher prices in restaurants and hotels (+6.3%yoy; Sep-21: +5.1%yoy).

Besides, other components such as transport; food & beverages; and miscellaneous goods & services also contributed to the stronger inflationary pressure during the month. Excluding the volatile prices of food and energy, the core inflation rate jumped to a 10-year high of +3.4%yoy (Sep-21: +2.9%yoy).

From a month-on-month basis, the CPI inflation rose faster-than-expected to +1.1%mom (Sep-21: +0.3%mom), registering the highest monthly rise since Apr-93. In another release, the latest inflation for producer prices expanded to +8%yoy in Oct-21 (Sep-21: +7%yoy), the fastest pace since Oct-08, mainly due to the high crude oil and food prices.

PPI inflation also rose on monthly basis to +1.1%mom from +0.7%yoy in the preceding month. With the high PPI inflation, we anticipate cost-push inflation will continue to exert upward pressure on general consumer prices as suppliers continue to incur high costs.

The persistent supply bottlenecks and rising commodity prices will keep driving up production costs. Given the elevated inflation and the recent developments in the economy, the Bank of England will most likely consider tightening its monetary policy in the upcoming monetary policy meeting next month.

Japan’s exports growth hits 8-month low as auto trade slides

Japan’s exports snapped seven months of double-digit growth in October due to slowing car shipments, as global supply constraints hit the country’s major manufacturers. The slowing growth shows Japan’s vulnerability to supply chain bottlenecks that have been particularly disruptive for the car industry and have clouded the outlook for trade. Exports rose 9.4% year-on-year in October, Ministry of Finance data showed on Wednesday, slightly below a median market forecast for a 9.9% increase in a Reuters poll, reports Reuters.

Analyst’s View

Japan’s trade deficit shrank sharply to -JPY67.4b in Oct-21 (Sep-21: -JPY624.1b), marking the third straight month of trade deficit. The smaller trade deficit was due to the decline in imports (-2.9%mom) and stronger exports growth (+5%mom). On an annual basis; however, exports expanded at a slower pace of +9.4%yoy (Sep-21: +13%yoy) amid the disruption in manufacturing activities due to the prolonged tight supplies as well as the easing foreign demand as other countries struggled with renewed Covid-19 outbreaks.

As Japan’s automakers continued to struggle with the ongoing global semiconductor shortages, the export of transportation equipment dropped further by -28.7%yoy (Sep-21: -24.5%yoy). Meanwhile, the increased sales of machinery, electrical machinery, chemicals, and manufactured goods contributed to the overall exports growth. By destination, the outbound shipments grew at a softer pace for China (+9.5%yoy), Hong Kong (+11.3%yoy), South Korea (+21.8%yoy), Singapore (+8.7%yoy), and Malaysia (+15.7%yoy) while exports to the US rebounded by +0.4%yoy (Sep-21: -3.3%yoy).

On the other hand, imports surged by +26.7%yoy during the month albeit slower than the +38.6%yoy in the prior month. Imports generally rose for most of the products on the back of higher commodity prices and the rebound in domestic demand amid the relaxation of Covid-19 curbs.

The inbound shipments are sourced from most countries such as China (+11.4%yoy), Germany (+2.9%yoy), Australia (+90.5%yoy), and the US (+18.5%yoy) rose at a marginally faster pace while imports growth from Malaysia accelerated to +25.4%yoy (Sep-21: +22%yoy). Since Japan is one of Malaysia’s major trading partners, this could potentially indicate that Malaysia’s external trade performance strengthened further in Oct-21.

Moving forward, we foresee the robust global demand for semiconductors and semicon machinery, among others, will continue to foster Japan’s external trade performance in the near term. According to the latest readings from IHS Markit Business Outlook, business sentiment hit a new record high in Oct-21 as firms were more optimistic that the pandemic will eventually end with the rapid progress in vaccines and both global and domestic demand will recover.

However, the slower growth in China, rising production prices, raw material shortages, and the resurgence of Covid-19 cases in certain countries are some of the factors which pose a downside risk to Japan’s trade outlook.

Source: MIDF Research Malaysia

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