Japan Spent Thirty Years Trying to Create Inflation. Germany Reports Tuesday.

Japan Spent Thirty Years Trying to Create Inflation. Germany Reports Tuesday.

On Friday I published a risk-off call with high confidence ahead of the US CPI print. It did not hold.

The session closed with volatility lower and gold higher, having dodged the print entirely as yields handed the bulls a lifeline. I was wrong on the day, and I would rather put that at the top of a piece than bury it at the bottom of one. The scenarios I published that morning covered a hot print, an in-line print and a cool one. What actually happened was that the market looked past the number altogether, which was not one of the three.

That matters more than the miss itself, because publishing scenarios before an event is only worth doing if the ones that fail get the same treatment as the ones that work.

What I was not wrong about is the sequence, and this week puts another test in front of it.

What Friday Actually Told Us

Japan's August producer price index came in at 7.6% year on year, above expectations and the fastest reading in decades.

Pause on which country that is. Japan spent thirty years unable to create inflation. Zero interest rates. Quantitative easing before anyone else attempted it. Abenomics. An entire generation of economists studied Japan specifically as the case where conventional monetary policy stopped working. Every tool available was tried, and prices would not move.

So a 7.6% producer print arrives with no domestic policy change to explain it. No wage spiral, no fiscal surge, no demand boom. That absence is the useful part, and it is why Japan reads as the cleanest evidence yet that something external is driving this.

Why Tuesday's German Number Is More Useful

On Tuesday morning Germany reports wholesale prices. The estimate is 6.2% year on year, against 5.3% the previous month.

The number is smaller than Japan's. It is also more useful, for two reasons.

The first is that it was forecast. Japan's print was a surprise, which meant every piece of analysis written about it arrived after the fact and explained something already known. Germany's comes with a published expectation, so the question is not what happens. The question is whether the estimate holds, and if it misses, which direction it misses in. That turns an event into a test, and tests are worth writing about beforehand.

The second is what the number actually measures. Japan imports roughly 90% of its primary energy, but a significant share of that lands as household energy cost. Germany imports most of its own energy into an industrial base that consumes it as a production input. German wholesale prices therefore sit closer to the real cost base of European manufacturing than Japanese producer prices do to anything comparable.

If the mechanism is what I think it is, Germany should show it more directly.

Two Importers, One Input

The argument I have been making since late August is narrow, and worth stating precisely so it can be checked.

Seven central banks have turned hawkish or flagged inflation risk since 20 August. Sweden's Riksbank named the cause directly. Hungary's governor did the same last week. Turkey held rates citing inflation risk. None of them coordinated, and several of them have very little in common economically.

What they do have in common is that they buy energy they do not produce, into a market where oil is above a hundred dollars.

An economy producing its own energy absorbs part of a price shock internally, as a transfer between domestic sectors. An importer has no such buffer. The full cost crosses the border and lands in the production chain, and from there it works through to everything else on a lag.

That is the whole thesis. It is not complicated, and it is falsifiable, which is the point.

The Rest of the Week

Monday brings India's CPI at 10:30 GST, expected to accelerate to 4.8% from 4.45%. India is another large energy importer, though its inflation basket is heavily weighted to food, which makes the read noisier than Germany's.

Also Monday, Canada reports four high-impact inflation measures simultaneously at 12:30: headline, trimmed mean, median and common. Canada is an energy producer rather than an importer, which makes it a useful control. If the transmission story holds, Canada should look different from Germany.

Tuesday is busy. China reports industrial production, retail sales and unemployment at 02:00. Germany's wholesale number and the UK labour market data both land at 06:00. The German ZEW sentiment index follows at 09:00, expected at 37.0 against 34.2.

The UK number is a different shape and deserves separating out rather than folding into the same story. Unemployment is expected at 5.0%, up from 4.9%. Average earnings are expected to fall to 3.9% from 4.1%. A labour market weakening while input costs climb is not imported inflation. It is the other problem, and the two would require opposite policy responses, so conflating them would be careless.

The Scenarios, Before the Numbers

**Germany at or above 6.2%.** Two independent confirmations of the energy channel inside three days, from two economies with nothing else in common. The oil transmission argument stops being contestable at that point, and the seven-bank sequence starts looking less like a run of coincidences.

**Germany soft.** The first genuine counter-evidence since 20 August. This outcome would be more significant than a hot print, because it is the only one that breaks the chain. A soft German number in an economy that imports most of its energy, three days after Japan printed 7.6%, would mean the mechanism I have been describing does not transmit the way I think it does.

**Canada diverging from Germany.** Supporting evidence either way. As an energy producer, Canada is the natural control in this experiment, and a Canada that behaves like Germany would suggest something broader than energy is happening.

What Would Change My Mind

A soft German print on Tuesday.

I am stating that now rather than afterwards, because otherwise it is not a position. It is a narrative, and narratives adjust to fit whatever arrives.

The full calendar for the week, with what each outcome would imply, is free to read and does not require an account.

*Educational only. Not financial advice. No entries, stops or targets are given here or anywhere else we publish.*