EMU Inflation: Headline Is contained; Core Is the Issue; Services Prices Are Nettlesome

EMU inflation ticked up by 0.1% in June after also rising by 0.1% in May – good stuff! The large countries show May changes ranging from 0.3% to -0.1%. May saw inflation rising in a range of 0% to 0.2% for the Big Four economies. That’s a nice, tight, low range.

Sequential inflation shows headline inflation running at 2.5% over 12 months and at 2.8% over six months, that decelerates to 1.7% over three months, more good news. But across the large economies in the EMU, inflation generally accelerates over three months to a 5.4% pace in Germany, 3.5% in France, and 3.0% in Italy. Only Spain shows a slower 1.7% pace. However, the year-on-year rates are more target-friendly. There, Spain has a high gain at 3.6%, Germany and France have 12-month rates that cluster around 2.5%, and Italy has a gain of 1%.

However, when we look at the core – excluding food & energy or just ex-energy - the results are much less target-friendly. Year-over-year France and Italy are close to target, with France at 1.9% and a 2.1% pace in Italy. German inflation is up at a 2.6% pace ex-energy while the core in Spain has inflation up by 3%. However, the tables are turned over three months where Germany and Spain show inflation as moderate at a 2.1% pace and France and Italy have core inflation up at a 2.6% to 2.8% pace. Still, these numbers are getting closer to the ‘two-percentish’ target the ECB current has.

It is a global phenomenon that goods sector inflation is tame and service sector inflation runs hot. Service sector inflation is below 2% in none of the countries in the table. We chronicle inflation slowing, however, and find that service sector inflation is largely moving in the right direction slowing across 65% over the month entries compared to 3 months and over 6 months compared to 6-months ago. Inflation is lower over 12 months compared to 12-months ago in 88% of the categories. So, the sequential profile is good, but the pace of inflation is still too high.

Spain, Finland, Norway, and Slovenia show steady deceleration in service sector inflation 12-months to 6-months to 3-months. All show inflation falling over those respective comparative horizons. Germany alone shows steady acceleration on that horizon.

However, we can also point-out that for services inflation for the EMU overall -and these are data through May only- service sector inflation is up by 4.1% and it is accelerating ever so slightly over three months and over six months. That is despite the breadth of deceleration on a country-by-country comparison. So, while the picture across EMU services prices seems good, the weighted results for the EMU itself are less so, showing service sector inflation too high and rising.