Core Inflation in Key EMU Members: Mostly Above Target and Not Falling

Inflation of the European Monetary Union in August rose by 0.2% compared with 0.3% gain in July and a 0.2% rise in June. The three-month inflation rate at 2.5%, however, is part of a slow progression higher that compares to a 2.2% annual rate over six months and a 2.1% annual rate over 12 months, a moderate but clear accelerating pattern.

Country level trends The four largest countries in the monetary union also are exhibiting patterns that suggest or that outright demonstrate, inflation acceleration at least based on headline measures. Germany is the largest monetary union economy and is a slight exception with a 2.2% inflation rate over three months, down from 2.5% over six months but up from 2.1% over 12 months. France demonstrates inflation rising from 2.2% over 12 months to a pace of 2.4% over six months to a strong 3.6% over three months. In Italy, inflation transitions from a low 1.3% over 12 months to a 3% pace over six months, to another strong pace of 3.7% over three months. Spain is the true exception with inflation well behaved across most of the cohorts at 2.3% over 12 months, an elevated pace but not by much, especially when compared to a 0.7% pace over six months that only ticks up to a 0.8% annual rate over three months.

Monthly results by country The inflation process among these four large countries is still somewhat mercurial as August showed declines in inflation in Germany and Italy on a month-to-month basis while Spain's inflation was flat. On the face of it, this is good news; however, July brought an increase in prices of 0.8% month-to-month in Italy, 0.5% in Germany, 0.4% in France with a moderate 0.2% gain in Spain. So whatever the three-month pace is, it's the product of some fairly erratic monthly numbers and therefore not yet something that we can consider to be very reliable.

Core inflation Core inflation is a different story. Here we get core or at least an ex-energy reading from Germany, Italy, and Spain. The August readings are contained with German ex-energy inflation up by 0.2%, Italian core inflation up by 0.1% and Spain’s core inflation up by 0.3%. These are decelerations from stronger gains in July across the board. And two of these three countries also had larger increases in June than they had in August. Looking at the progression of core inflation for Germany, the 12-month ex-energy rate is 2.5%, the six-month pace is 2.6%, and the three-month pace is 2.4%; all pretty steady stuff. Italy shows core inflation at 2.4% over six months and 12 months that moves up to 3.1% over three months. Spain shows core inflation at 2.7% over 12 months, up to 2.8% over six months and up to 4.3% over three months.

The performance of Brent oil prices explains the headline/core difference as oil prices fell over these progressively longer periods; over shorter periods oil prices have fallen faster tending to push headline inflation down faster over these short horizons contributing to the illusion of inflation deceleration. Even so, deceleration is not a pattern that is detectable in headline inflation for these countries.

The bottoms line here is that core inflation is still stuck and too high and that is too much evidence of inflation accelerating even in the face of easing oil prices for monetary policy to seek further accommodation.

As we peruse the inflation trends, we find they are accompanied by output trends that are erratic even more than they are weak. Median output among the early reporting EMU members in July shows a gain of 1.0% compared to a gain of 0.4% in June. These contrast to a 0.5% drop in May. Median output among this group falls by 3.7% annualized over three months, rises by 1.5% annualized over six months, and falls by 0.9% over 12 months. And output is falling on the median measure in the quarter-to-date (early in Q3). Still, we also see output trends accelerate more than they decelerate across countries in June and July with a proportion of about 60% accelerating to 40% not accelerating. Over three months, that full period shows acceleration in only about one third of reporters; output accelerates in half the reporters over six months and for two-thirds of them over 12 months.

Mixed, as well as, mixed-up trends On balance, the performance of inflation and industrial output in the EMU is mixed. Over three months the output trend is especially hard to pin down with declines of 26.5%, 18.3% and 17% annualized for some reporters juxtaposed to increases of 23.7% annualized, 18.4% annualized and 11.1% annualized- and, of course, more. In such a mixed constellation of growth rates, it is hard to discern trend. However, Portugal, the Netherlands, France and Germany, each reporter shows declines in each of the broader sequential periods- they also show deterioration is worsening. Belgium, Finland and Ireland, a decidedly smaller class of economy, all show persistent IP expansion and acceleration. The quarter-to-date shows declines outnumber increases across EMU members by two-to-one. Still, a lot of these trends are rooted in sharp declines logged in July. The gyrating three-month growth rates also are important contributors to growth results over six months and 12 months. When three-month growth rates are turbulent, they tend to impart their turbulence across the timeline.

For now there is more weakening in this report that I would like to see, but it also is still a mixed report. PMI data remind us that while manufacturing has been weak there has been countervailing strength in services to support growth. The failure of inflation data to clearly fall into line and weaken also is suggestive of a more mixed real sector economic performance. With such data trends in progress, central banks are likely to continue to play the waiting game.