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Improving global growth marred by rising inflation

Recent improvements in the global economy continue to be accompanied by rising costs. Updated inflation data for the United States, China and the Euro area this week will offer analysts hints as to the direction of future monetary policy decisions.

Recent improvements in the global economy continue to be accompanied by rising costs. Updated inflation data for the United States, China and the Euro area this week will offer analysts hints as to the direction of future monetary policy decisions.

Slower growth in the US is being accompanied by higher cost pressures, despite oil prices moderating last month, sending mixed signals to policymakers. There is a risk of being behind the policy curve should inflation accelerate more than expected.

With March data showing manufacturing input costs rising to a two-and-a-half year high, traders will monitor inflation numbers to confirm signs of building price pressures. Analysts will also watch retail sales data given that consumption has been a major driver of US growth.

Especially strong cost increases are being seen across China’s manufacturing economy. Purchasing Managers’ Index (PMI) data suggest that Chinese companies have been absorbing part of these higher cost burdens. While there were signs of easing inflationary pressures, cost increases nonetheless remained high, which is expected to be reflected in the latest producer price index.

Meanwhile, the Caixin China PMI data showed manufacturing export sales returned to growth after more than two years of decline. As such, the markets will keep an eye on China’s trade data this week, especially when March is the first month where data are not influenced by the Chinese New Year holidays.

Similarly, rising inflationary pressures were observed alongside the broad-based upturn in the Euro area, according to the final Eurozone PMI surveys, which rounded off the strongest quarter since early 2011.

While the upward price trends highlighted by the PMI data may add to calls for the European Central Bank (ECB) to consider tightening monetary policies, especially if confirmed by official inflation data, it seems that the central bank will likely maintain its accommodative policy stance until at least later in the year. ECB president Mario Draghi commented last week that it is too early to tell if higher price pressures will be sustained.

The recent rise in costs has been linked more to higher global commodity prices, and in some cases weak currencies, rather than stronger demand.

While a number of major central banks are keen on getting inflation higher, it is a fine balancing act. A sustained increase in costs will risk having a detrimental impact on spending, investment and hiring plans.

At home, the Monetary Authority of Singapore will set monetary policy on Thursday, where it is widely anticipated to maintain current policy settings, after signs of a growth pick-up in the Republic.

The Nikkei Singapore PMI indicated a stronger improvement in the health of Singapore’s private sector last month, and the latest PMI data are consistent with an annual gross domestic product (GDP) rate of between 2.5 per cent and 3 per cent for the first quarter. Singapore will also announce the flash estimate of first quarter GDP.

ABOUT THE AUTHOR: Bernard Aw is an economist at IHS Markit.

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