Why the Core Inflation Rate is Higher than Nominal Inflation Rate ?

(ParaImbal Research)
​​
​By Asseged Major

​Historically Nominal Inflation most of the time is higher than Core Inflation. The reason being is because Nominal Inflation takes into account volatile items such as Energy and Food, while Core Inflation strips out those items. Currently Core Inflation in a number of countries is higher than Nominal Inflation ( USA, China, Germany, New Zealand, Brazil, Mexico ) ( Look at Figure 1, Highlighted in Yellow) 

Nominal Inflation vs. Core Inflation (YoY)
​(Figure 1)

(Data : tradingeconomics.com)

​Reasons For Core Inflation higher than Nominal Inflation 

(Oil & Commodities Drop in Prices )

A main reason for this is that the price of Oil (Energy) and other Commodities are at lower price levels than last year, Example Crude Oil reached a peak of $ 120 range and Copper reached near $ 5 level in 2022. Although recently Price of Oil has increased to $ 90 price ( Figure 2 : Chart of Crude Oil, Figure 3: Chart of Copper ).

WTI Crude Oil Price (Figure 2)

(Data : Yahoo Finance, Date : 9/26/2023)

(Figure 3) Copper Price

​Data: Yahoo Finance, Date: 9/26/2023)

(China Largest Global Share of Commodities) 

China is the biggest purchaser and importer of Commodities. As you can see in the chart below, China for a number of Commodities has a significant or 50 % or higher in global share .China for example consumes 50 % of Copper from the global share, and imports 60 % of the global share that is traded in Copper. China consumes 60 % of iron ore, and imports 70 % of the global share that is traded in iron ore, and consumes 50 % of Coal, and imports 60 % of the global share that is traded in Soybeans. ( Figure 4 – China Global Share Commodities)

(Figure 4) China Global Share of Commodities 

(China Weakening Economic Growth )

In the first 2 quarters 2023, China has experienced disinflation with substantially lower economic growth than originally expected from the China Reopening. This has been a  leading effect on decreasing Commodities Prices, and not meeting market expectations ( Figure 5 – China GDP Growth, Figure 6 ) .

(Figure 5) China GDP Growth Rate (Qtr to Qtr) 

(Data : tradingeconomics.com; National Bureau of Statistics of China)

(Figure 6) China Nominal Inflation Rate (YoY)

(Euro Area Weakening Economic Growth )

At the same time, the Euro Zone has been experiencing slow to flat and some cases negative economic growth.             

(Figure 7) Euro Zone GDP Growth Rate (Qtr to Qtr)

(Figure 8) Euro Zone GDP Growth Rate (Annual)

Potential Drivers of Inflation or Disinflation ( China & Euro Zone Slowing Economic Growth + OPEC Supply Production Cuts )  

•While both China and the Euro Zone area have been experiencing lower pace of economic growth, Globally the Core Inflation Rate in a number of countries has been continuing near or higher than the Nominal Rate. The Core Inflation Rate seems stickier than the Nominal Inflation Rate. A scenario where there is a  rebound in Economic Growth in Euro Zone and China may cause further pressure in prices elevating inflation as consumption in Commodities and Goods/Services increase in demand. 

•OPEC has been continuing their current policy of reducing Oil Output, to reduce the Global Supply of Oil, further adding to the Price Pressure that assists in increasing Inflation. 

•Thus, if these factors continue to head in this direction, the Nominal Inflation Rate may increase further in the medium term, thus making prices more sticky in the medium term. 

​•To the contrary, if Oil Prices continues to  increase from the effects of OPEC Supply Cuts in an environment of low / stagnant economic growth like Euro Zone and China, this effect may further cause decrease in inflation causing disinflation and to potentially deflation. 

Disclaimer : 
ParaImbal, LLC is a registered CTA & CPO ( Commodity Trading Advisor and Commodity Pool Operator ) with the CFTC (Commodity Futures Trading Commission) and NFA Member. This content is for informational purposes only. This information is of the opinion of ParaImbal, LLC and Asseged Major. This information is not mean’t to be investment advice. This is not a offer to participate a futures trading program, or securities.