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Healthcare Inflation Can Force Investors Into Critical Condition

Healthcare Inflation Can Force Investors Into Critical Condition

By    |   Friday, 14 October 2016 07:20 AM


China saw positive consumer price inflation (CPI) and positive producer price inflation (PPI) with the latter rising by 0.1 percent year-on-year (y/y) in September, contrary to forecasts for a 0.3 percent drop following a 0.8 percent drop in August.

The increase is the first year-on-year rise in five years. A driver behind the increase was a 4.1 percent increase in the collective prices of ferrous metals, non-ferrous metals and coal.

By the way, it might be wise not to overlook the fact that in accordance to a Chinese spokesman, the current soaring coal price has no market foundation and is not sustainable.


The CPI, meanwhile, rose by 1.9 percent - a three month high - compared with 1.3 percent in August and a consensus forecast of 1.6 percent.

Interestingly, the PPI number of +0.1 percent y/y has generated some babbling nonsense in some areas of the media with one suggestion is that this 0.1 percent rise ends a global deflationary force.

So, keeping both feet on the ground might be not such a bad idea as well as looking somewhat closer at the broader picture.

China’s exports fell in price last year by about 0.8 percent. On a generous interpretation, goods leaving China account for around 5 percent of global GDP, and that’s an extremely generous interpretation. That means that Chinese export prices will have contributed -0.04 percent to world inflation rates.

Because China is a less efficient consumer of commodities than it is a producer of goods, China’s impact on commodity prices via demand is likely to impact China’s impact on export prices via supply.

If China has been a driver of dis-inflation, then the world would have seen far higher correlations of core inflation rates than actually is the case.

Inflation may well be rising in parts of the world today, but it will be local factors that are driving it, just as in the past.

In the United States, the supply and demand balance is what matters to inflation. Actually, the U.S. labor market is around 70 percent of the U.S. consumer inflation measure and part of that will be on display today with the release of U.S. retail sales data.

U.S. consumer pressure for the shopping mall is one of the most powerful forces known to mankind, but that passion has dimmed somewhat over the summer.

One reason for that may be the rapid pace of healthcare inflation, which has eroded the ability of the consumer to spend on non-healthcare related items. Because healthcare is not 'in' retail sales, that can give stronger consumer spending without strengthening the retail sales numbers.

Nonetheless, there is reasonable upbeat expectation around today's numbers with the market consensus looking for a bounce back.

For equity investors, healthcare inflation is an important point.

The drivers of inflation at the moment are not necessarily corporate drivers of inflation.

Healthcare and housing are not things, which tend to help corporate earnings that indeed price increases in these areas can hurt corporate earnings.

U.S. producer price inflation is a far better measure of that sort of pricing pressure as U.S. companies are likely to sell to other companies.

The expectation is for continued positive momentum in producer pricing pressures.

Over in Europe, European Council President Donald Tusk has made some bold statements in a prepared speech: “The brutal truth is that Brexit will be a loss for all of us. There will be no cakes on the table. For anyone. There will be only salt and vinegar … the only real alternative to a “hard Brexit” is “no Brexit” … it is and can only be for the UK to assess the outcome of the negotiations and determine if Brexit is really in their interest.


In the absence of any damaging statements from UK politicians in response to Mr. Tusk's statements, the reaction of markets has so far been muted, but one can never be sure when a damaging statement may appear.

Finally, Fed Chair Yellen will give a prepared speech that carries an interesting title “The Elusive Recovery.”

As always, let’s hope we will get a little bit wiser.


Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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As always, let’s hope we will get a little bit wiser.
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Friday, 14 October 2016 07:20 AM
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