Introducing CPI nowcast indicators for Emerging Market countries – China and Brazil
Macro Insight
New Emerging Markets CPI indicators at QuantCube
We are pleased to announce that two new CPI indicators for China and Brazil are now available on the QuantCube Macroeconomic Intelligence Platform (MIP). This is a part of our plan to expand our coverage to countries in emerging markets. The new CPI indicators are available on our platform alongside our CPI nowcasts for developed countries including the US, France and Germany.
The QuantCube CPI Nowcast Indicator quantifies the current Consumer Price Index at a country level in real-time. By crossing and aggregating multiple subcomponents, the indicator tracks official consumer price numbers with a strong correlation of up to 99%. Updated daily, this indicator provides users with valuable insights for inflation trends ahead of official numbers, which are published with a time lag.
To construct these indicators, we leveraged the methodology we created for developed countries, namely France, Germany and the US. Consumption habits differ across countries, therefore, the data and their weighting in the CPI calculation varies from one country to another. Our CPI indicator calculations for China and Brazil incorporate two specific observations:
Food and tobacco, together with transport-related prices such as motor fuels best explain the dynamics of inflation in China
Brazilian CPI is largely driven by two factors: transport prices, especially motor fuels and public transport, and essential food prices for items such as legumes and meat.
We collected frequently published alternative data related to the above observations and processed them in real-time to have a complete view of all sub-components related to inflation before finalizing the development of the indicator.
The above methodology allowed us to create unique indicators for emerging market countries where official data is often less granular and with a limited focus on real-time insights. Our CPI nowcast indicators are designed to provide timely insight for the inflation outlook with the inputs from main sub-components that determine inflation trends. Such insights are especially valuable for emerging market countries where accurate assessment of economic conditions is often challenging. Using these indicators, investors can gain a significant competitive edge to generate additional alpha in currency hedging and fixed income strategies. Once combined with our other indicators such as GDP Nowcasts, real-time CPI indicators can also help determine the current macroeconomic regime effectively. The results can then be used for asset rotation and/or other more complex investment strategies.
*For further information about the methodology please refer to Leveraging alternative data sources for socio-economic nowcasting
China CPI trend – weak domestic demand and crisis in the property sector
Exhibit 1 and Exhibit 2 show the trend in the China CPI Nowcast with its decomposition. Chinese CPI dropped significantly from the peak in early 2020 and now stands at below 3%.
Today there is growing evidence that China’s economic growth is being challenged by weak domestic demand and the persistent crisis in the real estate sector, which accounts for nearly one third of China’s economic activity. According to our observations, Chinese CPI rose 2.58% YoY as of September 28 after the stimulus package introduced by the Central Bank of China. However, after the lower interest rates were introduced, the Yuan has been depreciating against the main currencies, especially against the US dollar. To slow the Yuan’s depreciation, the Central Bank has now paused its monetary easing. It will be interesting to see how future actions by the Central Bank will affect the overall economic outlook in China.
Brazil CPI trend - a significant drop in inflation after massive state intervention
In mid 2020, Brazilian inflation started to increase steeply and reached a peak of +12.9% YoY on May 19, 2022. Consequently, the Brazilian government introduced several measures to help people cope with soaring prices. These measures included tax breaks on daily essentials such as gasoline, one of the main drivers of Brazilian CPI. The Central Bank also introduced higher interest rates to tame inflation.
Reflecting these actions, Brazilian CPI drastically dropped last month and currently stands at 5.4% as of September 28 (Exhibit 3 and Exhibit 4). The Central Bank of Brazil left the interest rates unchanged on September 21 2022, technically pausing its aggressive monetary tightening cycle. As the presidential elections in Brazil are now looming, the sharp decline in inflation might have a decisive impact on election results. We will continue to monitor the situation closely in the coming weeks to see how the economic outlook in Brazil evolves.
