EMU Inflation Pace Is Lower Y/Y; Still Too High- and Not Clearly Falling or Prone to Fall

EMU inflation overview By category, inflation is not accelerating over shortening periods. The year-over-year chart shows inflation in the EMU is lower and less prone to rise over 12 months than other major monetary centers. But, break it down… to 12-months vs. 6-months…to 6-months vs. 12-months…to 3-months vs. 6-months and EMU inflation goes from accelerating over 12 months (compared to 12-months ago) to accelerating in 38% of categories over 6 months (compared to their 12-month pace) to accelerating in 53.8% of categories over 3 months (compared to their pace over 6-months). The inflation worm is beginning to turn within the EMU and within the one-year time horizon. And we know that what is next is more growth, more price pressure, and more military spending in the EMU because of change in upcoming fiscal policy. So, it is becoming clear that the ECB is not going to get back to its 2% target unless or until it is ready to raise rates again. And NO ONE is saying that yet.

Core trends in EMU- Core inflation shows prices better-behaved than headline inflation and across the four largest EMU nations. Inflation is excessive on core inflation year-on-year in Germany and Spain; over 6 months, in Germany and over 3 months, in both Germany and France. Inflation is accelerating on the core measure for German inflation over 6 months and for French and Spanish inflation over 3 months.

Headline inflation- By comparisons, headline inflation is flaring more but it is less stable, more mercurial, so these trends may not prove to be lasting. Still, headline inflation accelerates over 3 months compared to 6 months in three of four countries and is excessive (above 2%) in three of four of the largest EMU nations. Over 6 months, two of them are showing acceleration and excess inflation at the same time.

Commodity level trends across EMU- By commodity category or economic grouping, inflation is prone to accelerate as we note in the first paragraph. Contrarily, the monthly data show decelerating pressures while the sequential 12-, 6-, and 3-month data show a tendency to more acceleration. On monthly data, inflation accelerates in 12 categories in December, in 6 categories in January and in 4 categories in February.

Summing up Cross currents in inflation are severe. Inflation trends point in different directions over differing horizons. It is hard to form firm conclusions from past data trends except to the extent that past trends do not agree on any direction and currently inflation is excessive. Since the Euro-fiscal winds have shifted, the much better bet at the moment is that Euro inflation may now be at or near its low and after this it is likely headed higher, and then ECB rates will likely have to rise.