00:00The war in Iran shows no signs of cooling down and neither does inflation.
00:05Consumer prices in the U.S. jumped to a three-year high of 4.2% propelled by soaring energy
00:12prices.
00:13And that was a jump of 0.5% compared to April, the first time consumer inflation has crossed that
00:204% threshold since May 2023.
00:23It's a similar story for manufacturers in China.
00:26Those sky-high energy costs pushed producer prices up 3.9% compared to a year earlier, their highest level
00:34since July 2022.
00:37But the picture changes as we move from the factory floor to the shop floor.
00:41Consumer prices in May rose just 1.2% compared to a year earlier, led by gasoline and gold jewellery.
00:49Mark Oswald is Chief Economist and Global Strategist at ADM Investor Services International.
00:55Great to see you, Mark.
00:56So are we looking at two very different inflation stories in the U.S. and China?
01:04Yes, to a certain extent we are, because underlying core CPI in the U.S. is running around 2.9
01:12% as against 1.1% in China.
01:15And when one looks at the producer price data in China, it's very instructive, because you've got the pressures from
01:23energy prices 15.8% up for mining, raw materials 9.2%, even manufacturing 2.8%.
01:32And then you look at the subgroup of consumer goods, and it's still a negative territory at minus 0.8%.
01:38By contrast, in the U.S., you've got core inflation running at 2.9%.
01:44It was slightly better if you exclude the housing component, but it's still running at 2.4%.
01:50That's above the Fed's target.
01:52It's not a game changer for the Fed, but it certainly shows that demand is keeping inflation relatively buoyant in
02:02the U.S.,
02:03whereas demand in China, particularly domestic demand, outside of the pressures related to the Middle East conflict is really quite
02:12subdued,
02:13particularly when one considers there was quite a big boost from base effects from last year.
02:17You talk about domestic demand.
02:19What about the Chinese consumer?
02:22Are they going to eventually feel that factory floor price pressure that we're seeing now?
02:30At the moment, all the evidence points to actually the people who are going to feel it most are manufacturers
02:37because they're struggling actually to pass on the higher input costs.
02:42Yes, there will be some pass-through, but I rather suspect, given the low level of domestic demand,
02:49that there will not be that much.
02:51So really where this is going to hit is in profit margins.
02:55Now, let's go back to those U.S. numbers, because are they facing a broader inflation problem, do you think,
03:03or is it still mainly all around energy?
03:07The services inflation is still running quite hot.
03:11It's around 3.5% year on year.
03:14It's slightly better than it was.
03:17But, you know, the scope for pass-through, I think, is much, much stronger in the U.S.,
03:24and one has to remember that for the time being, given domestic demand, you know, consumer demand,
03:31it's a very disparate picture between high earners and low-income families.
03:37Low-income families are definitely feeling the pinch here very hard,
03:41but for, and particularly in what I would call non-discretionary areas,
03:46but for high earners, the demand is still there,
03:51and, you know, it always takes time for these sort of energy costs to feed through outside of airfares,
03:57which is obviously a big contributor to the inflation that we've got at the moment,
04:02running at about 26.7% year on year,
04:06which in a country like the U.S., where everyone flies, does actually have a fairly substantial impact.
04:12The pass-through isn't there yet, but the second part of the year, more than likely.
04:17Just very quickly, because you mentioned that all-important Fed meeting next week.
04:21Do these numbers make that meeting a bit awkward?
04:26It certainly means they're going to have to sound, you know, sound a warning bell,
04:31that if there is further evidence of pass-through, they will have to have high grades,
04:36and that's quite a seismic change from the messaging over the past three to six months.
04:44Mark Oxford, thank you very much indeed.
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