Editor's Note: Below is a note written by Hedgeye editor Eric Wallerstein and junior Macro analyst Ryan Ricci.
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What goes up, must come down.
Inflation in East Asia is rolling over as global price acceleration begins to reverse course (on a Rate of Change basis) off of the not-as-dramatic-as-Turkey-but-still-dramatic inflationary rocket ship.
Driven by unprecedented stimulus, supply chain constraints, etc., producer and consumer prices rapidly jumped to the highest levels in years in 2021. With Producer Prices (PPI) leading Consumer Price Inflation (CPI), we've been focused on the divergence between the two.
CPI-PPI spreads (producer price inflation subtracted from consumer price inflation) have widened to extreme levels globally. We're focusing on East Asia below given its manufacturing influence on the rest of the global economy.
While still deeply in negative territory, Chinese, South Korean, Japanese (and Russian) CPI-PPI divergences have begun to... converge, as producer prices flow through to the consumer, and both decelerate from their Q4 2021 peaks. The slight bumps are indicative of a continuing reversion to the mean.
For some historical context, Z-Scores (deviation from the average) are wild right now, anywhere from 98% to >99% below the mean.
- China CPI-PPI: -8.8 (Z-Score: -2.35)
- Japan CPI-PPI: -8.6 (Z-Score: -4.01)
- South Korea CPI-PPI: -5.3 (Z-Score: -2.27)
- Russian CPI-PPI: -20.1 (Z-Score: -1.94)
Brutally negative Z-Score + rolling over PPI = big time deceleration in headline CPI incoming.
Covid-induced comps led to (recent) record levels of inflation from March 2021 through year-end. As we get into March 2022, those comps get much more difficult. Thus, lower inflation levels.
Asian PPI's peaking in Q4 (Oct-Dec 2021 levels):
- China: 13.5% --> 12.9% --> 10.3%
- Japan: 8.3% --> 9.2% --> 8.5%
- South Korea: 9.1% --> 9.8% --> 9.0%
Producer peak --> consumer peak --> inflation down. Just as Team Transitory was wrong for a year and a half, Team Inflationista may not want to be so clingy to their narrative.