Economics & Growth | UK | US
Charts of the Week: Inflation Questions and FX Carry Concerns
- By Matthew Tibble
- 6 min read
Summary
- Falling energy prices are hiding strong underlying US inflation dynamics, such as accelerating real wage growth.
- FX carry returns are near cyclical extremes.
- UK June inflation shows core momentum slowing sharply, but a single weaker month does not define the trajectory.
- European gas storage is increasing quickly.
Is US Inflation Trending Down?
Many market participants are reading the low June YoY headline CPI print as the start of an inflation downtrend. However, it reflects largely base effects and a 17% YoY decline in energy prices. And falling energy prices are hiding strong underlying inflation dynamics. For example, real wage growth is accelerating (Chart 1).
Can FX Carry’s Stellar Returns Continue?
Global FX carry returns are near cyclical highs. Currently, rolling 12-month excess returns are at 21% – near the typical highs (Chart 2). If it ekes out another 5%, it will reach a two standard deviation extreme. This suggests we could be near the final run of positive returns, so we need to wary of flat returns or, worse still, a drawdown.
UK Core Momentum Slows Sharply
June UK inflation missed versus expectations, across core and headline readings. The +0.16% MoM core reading was the lowest since January’s surprise drop. It came out about where the typical June MoM would have been pre-inflationary spike (Chart 3). However, as January showed, a single weaker month does not define the trajectory. As such, this alone will probably not convince the BoE that they can pause just yet.
European Gas Storage Is Filling Up Quickly
Since May 2023, European gas storage has increased over 30% and is now over 906 TwH, or 80% full. Breaking down EU storage reveals storage sites in Italy, Germany, and Netherlands are over 80% full, with France lagging at c. 67% (Chart 4). We see a strong probability that EU gas storage could be nearly full by 6 October, even if gas injections into storage fall from their current pace of 21 TwH a week.
