Finimize - 💔 Japan's getting dumped

What’s going on here?

Valentine’s Day has hit at the right time, because economists’ on-and-off relationship with inflation looked well and truly back on after a spicier-than-expected update.

What does this mean?

The consumer price index, which tracks the prices of a range of goods and services, was a pinch higher in January than December and 3.1% higher than the same time the year before. That’s way above the Federal Reserve’s (the Fed) 2% target. What’s worse, the core reading – which leaves out especially volatile food and energy prices – was a more-than-expected 0.4% higher in January than December, the biggest rise in eight months. Housing costs bit particularly hard, surprising economists who’d predicted they’d slow down. But a measure of services, with housing excluded, still picked up by the most since May. Inflation across the board is clearly proving hard for the central bank to tame.

Why should I care?

For markets: The day the music died.

The Fed needs concrete evidence that prices are on a dependable decline before cutting interest rates. Ease up too soon, and the central bank risks letting inflation slip back out of control. So while investors had been betting on a rate cut sooner rather than later, the latest data lends itself to anything but. That’s rough for stocks. The lower the interest rate, the higher stocks are valued and the cheaper it is for companies to invest in themselves – both music to investors’ ears. For now, though, they’ll be stuck with silence.

The bigger picture: The 90s are back in style.

Citigroup expects the Fed to start cutting rates in June, an opinion shared with many other major banks. But it’s one of the very few predicting that the cuts will be short-lived, with the Fed hiking rates again afterward. That last happened back in the 1990s – just before, you know, the market totally crashed.

What’s going on here?

Japan’s economy is expected to fall behind Germany’s in the world ranking, but that might have more to do with the greenback than any true drawbacks.

What does this mean?

Japan’s currently the third-biggest economy in the world, but some analysts reckon the country will be handing that bronze medal over to fourth-place competitor Germany in the not-too-distant future. Still, Japanese policymakers – excuse the slight bias – have reason to be optimistic. The economy is expected to have shrunk from $6.3 trillion in 2012 to $4.2 trillion last year, it’s true, but that’s mainly because the Japanese yen weakened against the dollar during that time. In fact, when you take out the greenback factor, the economy likely picked up by 12%, instead. What’s more, with whispers that the central bank may raise interest rates for the first time since 2007, Japan may soon turn its decade-long deflation into healthier prices that feed into the economy.

Why should I care?

Zooming out: Race for the wooden spoon.

Germany’s hardly an intimidating opponent, mind you. Production levels in the country’s industrial sector – which tends to lend bragging rights to Europe as a whole – were 1.6% lower in December from the month before, reaching a level that’s 10% below the pre-pandemic rate. So Germany knows first-hand how inflation can tilt the balance: the country’s shoppers are paying more for less, and for now, that’s enough to keep one step ahead of deflation-struck Japan.

The bigger picture: A one-way ticket to India, please.

It’s no wonder Japan and Germany are jostling over the same spot on the podium. They both have aging and shrinking populations, which is weighing heavily on all sorts of industries. India, meanwhile, is on a tear: the country’s population not only inched ahead of China’s last year, but it’s younger, too. That spritely workforce is why, according to the International Monetary Fund, India’s on track to beat Germany’s economy as soon as 2027.