EMU HICP and Core: Turning the Corner on Excess Inflation s-l-o-w-l-y

Inflation in the European monetary area continue to be strong with August rising by 0.6% month-to-month after rising 0.4% in July and 0.2% in June. The closely watched core measure turned weaker in August rising by 0.3% after a 0.5% gain in both June and July.

Monthly inflation basics Among the four largest euro area members, all but Spain showed inflation increases month-to-month. Posting a 1.4% increase in its July HICP, August brought a much lower 0.7% increase. And what was a significant month-to-month deceleration for Spain was also the second largest monthly headline gain among the Big Four economies. Core inflation for the four largest economies accelerated in only two of the four largest economies. Germany showed inflation excluding energy rising to 0.4% in August after a 0.2% gain in July; Italy's core crept up by 0.1% after being flat in July. The core inflation rate in France edged up 0.1% month-to-month after a 0.5% gain in July, while Spain’s core rose by 0.4% in August after rising a sharp 1.1% in July. Spain’s 0.4% core gain was a deceleration and also tied for the strongest month-to-month core gain across the Big Four economies in August. Comparisons always are complicated when you look for context.

Trends in general When cast in terms of annualized inflation trends – 12-months to 6-months to 3-months- the trends were substantially mixed with negative results over three months. Inflation decelerations were broadly posted over 6 months compared to 12-months and for 12-month inflation rates compared to their values of 12-months ago. Headline inflation over 12 months broadly decelerates compared to 12-months ago while core inflation broadly accelerates.

Headline vs. core trends-acceleration/deceleration Headline inflation in August rises 5.3% over 12 months. That decelerates to a 3.3% pace over six months then ramps up to a 5.2% pace over three months. The 3-month pace is sharply higher than the 6-month pace; and the 3-month pace is only a tick weaker than the year-over-year gain. Core inflation in the EMU is up by 5.4% over 12 months then decelerates to a 4.8% pace over 6 months. Over 3 month inflation comes back to life with the EMU core rising by 5% annualized, on balance a speed-up over 6 months and a moderate slowing by less than one-half of one percentage point comparing the 3-month pace to the 12-month pace.

Sequential trends Looking at these same trends for headline inflation sequentially, all headlines show slower gains over 12-months compared to 12-months ago and another slowdown follows over 6 months compared to 12-months. But over 3 months headline inflation accelerates in all Big Four economies with two of them showing faster inflation over 3 months than over 12 months annualized. Inflation over 3 months accelerates compared to 12-months in Germany and Spain while it decelerates in France (by one-half of one percentage point) and in Italy where the inflation rate is nearly halved over 3 months compared to 12-months.

Core inflation sequentially Core inflation is more interesting from a trend standpoint. It shows year-on-year accelerations in three of four of the largest EMU economies compared to its 12-month pace of 12-months ago. Only Spain shows less pressure over 12 months. Over six months core inflation pressures drop broadly across each of the Big Four economies and by significant amounts. But over 3 months inflation accelerates in two countries and decelerates in the other two. Inflation surges to a 7.9% annual rate in Spain over three months, topping both its 6-month and 12-month pace. In Germany, ex-energy inflation picks up from 3.6% over six months to 3.9% over three months and still shows a two-percentage point back down from its year-on-year pace.

Oil continues to be a disinflation factor The bottom of the table chronicles the performance of oil prices showing Brent is still favorable monthly falling in both July and August -as well as declining on balance over 12 months, 6 months and 3 months.

Inflation evaluation-strange brew The table shows still unacceptable inflation levels and less than reassuring trends across the largest EMU economies as well as for the weighted-average impact of all member countries on EMU itself. With an inflation objective of about 2%, the ECB finds the five-year headline gain (compounded pace) at 3.6% compared to 2.6% for the core rate. Headline inflation over five years for the Big Four range from a high of 4% in Germany to a low of 3.1% in Spain – had I tried to tell you ten-year years ago that would happen, you never would have believed me! And this is for inflation over five years – not a monthly quirk. Core inflation over five years averages the highest among the four largest EMU economies in Germany at 3.2% and the lowest in Italy at 2.3%.

The sequential chart for core inflation shows a limited decline in the year-on-year pace, a more sustained drop off in the 6-month pace, and a faster drop in the 3-month pace but with backtracking in August.

Changes in the 12-month core inflation rate by country- different horizons Individual country data on core inflation for the Big Four economies shows the change (the drop) in the 12-month inflation rate is slowing in Italy and in France. The change in the 12-month inflation rate over 3 months: In Germany, the pace of the 12-month decline over 3 months at its best was falling by 1.2 percentage points. However, now that is down to a decline of 0.5 percentage points (annualized). Spain, in May saw its year-on-year pace falling by 1.8 percentage points over 3 months, but as of August, the 12-month pace is lower than it was 3-months ago by only 0.1 percentage point. Progress has nearly stopped in Spain. On broader data, looking at 12-month inflation changes over 6 months, each of the Big Four economies continues to show declines in the year-on-year core inflation rate with a reduction of 1.9 percentage points over 6 months for Germany, Italy and Spain and with France showing a slower decline in the pace of 0.6 percentage points. The drop in the 12-month inflation pace over 12 months is also steady and has progressed fastest and most consistently in Spain since February of this year. Spain’s year-on-year inflation pace compared to 12-months ago is lower on average by 1.2 percentage points. This compares to Italy where the year-on-year change has dropped to zero. Meanwhile, both France and Germany continue to tout inflation rates as higher by about one percentage point than they were one year ago, although for all Big Four countries the current metrics for inflation changes have been falling to lower values since the start of 2023.

Summing up Big broad picture is that inflation-core inflation- is falling and doing so slowly year-on-year, doing so more relentlessly over 6 months but showing sluggishness and possibly reversal over 3 months. Trends are tricky things we should continue to watch them closely. In that respect, it is not surprising that Spain, with the earliest and consistently fastest drop in the 12-month inflation rate is now experiencing the clearest and sharpest reversal and blunting of inflation progress in short-term data. We may call them ‘trends’ but they are not always linear and trends do change.