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Economy in Brief

What the EMU PPI Performance Tells Us About Regional Integration Or Chateaubriand for 19, Please
by Robert Brusca  March 6, 2017

PPI trends for the EMU show ongoing inflation acceleration as oil prices work their way through the system. Capital goods and consumer goods show a much more muted profile than intermediate goods where oil enters the picture more directly.

For capital goods the annualized three-month inflation rate is 0.5 percentage points higher than its year-on-year counterpart; for consumer goods it is higher by 1.3 percentage points; for intermediate goods it is higher by a stunning 5.7 percentage points. This clearly is oil price inflation at work.

We can also look at the inflation pulse tendencies by country and learn a few things. Since oil prices are hitting everyone at about the same time, we can evaluate oil pass through tendencies. The table below ranks inflation across the EMU and select EU countries by looking at the level of the PPI growth rate as well as at changes (acceleration) on several horizons.

Low rankings show high inflation or large inflation increases in the case of changes. High rankings indicate 'inflation resistance.' The clear cut cases are Germany, France and Portugal as inflation resistant countries. Each of these three has low PPI inflation relative to other countries in the table and relatively modest inflation increases on the various horizons. It is heartening to see Portugal on this list.

Ireland is a slightly discordant case with resistance in terms of inflation levels but less resistance in terms of recent changes. Finland is moderately resistant with weak changes in inflation but slightly higher tendencies (lower numerical rankings) for inflation levels.

Some of the inflation-prone countries are unfortunately familiar. Greece and Spain are seen near the top of the list but then so are Belgium and surprisingly, the Netherlands.

The U.K. is a discordant case with high inflation and low pass-through in terms of rates of change. This may be due to the fact that the U.K. inflation problem began earlier as part of the legacy of the weak pound sterling in the wake of the Brexit vote. Sweden is moderately discordant in the same way.

Denmark is quite discordant with low ranking inflation on all horizons but quite strong inflation acceleration in progress; Luxembourg is a clone of Denmark's situation. Luxembourg as a financial center is less dependent on its PPI in the sense that industrial firms do not generate that much of the wealth or growth in Luxembourg.

On balance, what is disappointing is that Spain and Greece fare so badly after all the austerity they have suffered through. Greece has even been mired in a relatively severe contraction and yet price increases are just flowing through the economy like water through a sieve. Spain, on the other hand, has been growing fairly well and its unemployment rate, while very high (as always), has been coming down. Still, it is too-easily generating PPI inflation.

Comparing inflation prone tendencies for EMU members to the period since 2008, it appears as though Belgium and Finland have gotten moderately worse. Italy has gotten moderately better. Despite the good performance for Portugal over the last year, there is no lasting evidence that has really improved its inflation resiliency beyond this recent episode.

The standard deviation among rates of PPI inflation across EMU-only members has shot through the roof and was last higher in October 2008.

Oil prices are sending inflation rates helter-skelter in the EMU at least at the PPI level and that means that monetary policy will be having a differential impact across EMU members. Even the standard deviation of core PPI prices is moving up sharply (when it can be compared).

While I do not see evidence of a real inflation problem developing, oil is having an impact and it is having a differential impact. I am saddened to see that countries that have gone through a lot of pain to reduce inflation and get budgets in line still pass PPI inflation through so quickly. It is potentially a bad sign for how things will work or (misfire) once the EMU exits its crisis mode. Germany apparently will go back to extending its lead in terms of price competitiveness and intra-EMU excesses will build up again even if budget deficits are not the cause. The U.S. has been able to develop and remain cohesive despite differing internal price levels and inflation rates. But that has been accomplished only with an extensive network of transfer payments which Europe lacks. And as long as Europe wants to be bifurcated: united but separate (with a united currency but separate fiscal policies, etc.), it is going to continue to introduce these sorts of mini crises. I am not encouraged by what I see. The longer this 'experiment' runs, the more flaws it exposes. Europe must close the loopholes or stop the experiment. You can't have one cut of chateaubriand for 19 cooked 19 different ways. No oven will do that and no cut of chateaubriand is that large. Europe must make choices.

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