The acceleration in US inflation remains contained, industrial production in Germany decelerated, stable credit in China

Macro Highlights - 5/15/2018

In short
  • In the US, headline inflation rose from 2.4% to 2.5% in April. While this moderate acceleration in overall inflation could continue through mid-2018, notably due to higher oil prices...
  • ...the increase in core inflation is set to be slighter in 2018, enabling the Fed to continue its monetary tightening at a gradual pace
  • In Germany, growth in industrial production decelerated in Q1, confirming a slowdown in growth in the context of a stabilisation of the economic activity
  • Credit growth in China stabilised in April while, notably, the shadow banking components continued to decelerate, in line with Beijing’s deleveraging plan

In the US, inflation is rising slowly but surely

In the US, the consumer price index rose from 2.4% to 2.5% year on year in April. While inflation had averaged 2.1% in 2017 and 2.2% in Q1 2018, this acceleration in prices could continue until July 2018, driven not only by an acceleration in GDP growth, but also by the rise in oil prices. Inflation could then fall back again in the second semester. Although these fluctuations in prices may worry some investors, the members of the Federal Reserve are likely to remain unruffled, as their preferred inflation measure is core inflation, which excludes energy and food prices, and which is expected to rise less sharply.

The slight acceleration in headline inflation was above all driven by a rise in the price of energy, the contribution of which rose from 0.4 percentage points (pp) in March to 0.5pp in April, and food.

  • The average oil price reached USD66.3/bbl in April (WTI price), up 29.5% year on year. If these oil prices persist, inflation could reach a peak of close to 3% in July 2018. However, this pace of inflation acceleration should be temporary, as it is mainly linked to the previous weakness of oil prices, with a WTI price as low as USD46.6/bbl in July 2017. Thus, as of H2 2018, growth in the price index could return to current levels.

Core inflation was stable at 2.1% in April, slightly below consensus expectations.

  • The trend in the prices of core goods, more than that of core services, is behind the weakness of inflation excluding energy and food. Since January 2017, the index of core goods prices (clothing, vehicles, medical products, tobacco) is down 0.6% on average year on year, while the prices of core services (housing, transport, medical care) rose 2.7% over the same period (see right-hand chart). In April, the drop in the prices of new and used motor vehicles, by 0.9% and 1.6%, respectively, from last year, again explained a large part of this weakness in goods prices.


  • Our recent analyses of the labour market and business investment show that the economic cycle could be prolonged in the short term without significant inflationary pressure. The return to the job market of a large number of people excluded from the labour force but available for work is notably set to limit an overly sharp increase in wages and, thus, inflationary pressure.
  • Thus, although overall US inflation could accelerate up until July, the slighter growth in core inflation is likely to persist in 2018. As a result, the Federal Reserve is likely to continue its monetary tightening at a gradual pace, in line with our scenario.

Germany - growth in industrial production decelerated in Q1, confirming a stabilisation of activity

The deceleration in economic growth in the euro zone can be measured by the momentum of the German industrial sector, which represents 9% of the eurozone’s GDP. The rebound in German industrial production observed in March is not enough to reverse a more marked slowdown in 2018, especially as lead indicators have just started their deceleration from cyclical peaks.

Industrial activity thus picked up in March by 1% month-over-month, supported by the production of capital goods (+2.6%) and consumer goods (+1.1%). Production in the construction sector rose 0.6% after February’s decline due to the poor weather conditions, a rebound that is in line with the return of the construction PMI to levels signalling expansion. Growth in indus trial production thus decelerated in 2018, going from 6.6% in December 2017 to 3.2% year-over-year in March 2018, notably with a monthly contraction of 1.7% in February.

The deceleration in Q1 was due to:

  • a large accumulation of stocks in 2017,
  • downward risks with respect to foreign demand, due to possible renegotiations of international trade agreements, notably with the US,
  • the appreciation of the real effective exchange rate of the euro by 8% since April 2017, and notably by 13% against the US dollar, which represents 28% of exports from Germany to non-EU countries,
  • recent wage renegotiations, which should nevertheless have temporary effects on industrial activity.

Thus, growth in the German industrial sector decelerated to a greater extent than is suggested by the lead business indicator s. The persisting negative effects of the appreciation of the euro, with non-EU economies contributing negatively to export growth in Q1, combined with the monetary illusions of the purchasing managers surveyed for the PMIs have fallen prey to, will reinforce this situation.


  • The gap between real data, notably weakening industrial activity, and PMI surveys that have dropped but are still at historical highs, is set to narrow over the upcoming months and confirm a slowdown phase in German economic growth in the context of a stabilisation of activity.

China – stable credit growth trends

In China in April, aggregate newly issued credit came in at CNY1,560 billion, higher than the CNY1,330 billion in March. This increase was due, among other things, to the lowering of the required reserve ratio for certain Chinese commercial banks, an operation that was equal to injecting CNY1,300 billion into the banking system. However, the yearly pace of growth in aggregate credit – although slightly higher in April at 10.6% vs. 10.5% previously – remains significantly below the levels of close to 13% that prevailed before the Communist Party Congress in October 2017, where Beijing instated as a priority the deleveraging of the Chinese economy and increased control of domestic financial risks. The composition of newly issued credit tends to confirm this more restrictive direction. Shadow banking market components notably continued to slow, while growth in “traditional” credit issued by banks recorded a very slight deceleration, at 12.8% in April. This deceleration was nevertheless offset by other components that finance the economy, in particular corporate bond issues.