EMU PPI Inflation Continues Strong and Accelerates

The PPI gain is strong The PPI in the European monetary area rose by 4.9% month-over-month in January. In December, the PPI rose by 2.7% m/m. The rate of growth for headline producer price inflation in the European monetary union is up at a 42.2% annualized rate over three months; that's an acceleration - but barely an acceleration- from its 40.6% annual rate increase over six months. Year-over-year producer prices are up at a 30.5% annual rate. These rates of growth compare to an inflation rate one year ago for the PPI that was up year-over-year at a 0.2% annual rate. This is a stunning and broad acceleration. Inflation is high… inflation is rising… inflation is accelerating broadly… and central banks, generally, still are waiting to make their first moves to head it off at the pass. That, at least, is true of the ECB and the Federal Reserve.

The PPI gain is broad Statistics and acceleration show that the PPI is accelerating in about 38% of the EMU members (and others in the table) in January compared to December whereas in December it increased in about 50% of them compared to November. Over three months inflation is accelerating in 46.2% of them; over six months it is accelerating at 61.5% of them. Year-over-year it's accelerating in 100% of the currently reporting members and others in the table. One year ago, even though inflation was much lower, it also was broadly accelerating with 78.6% of the reporters in this table showing inflation higher. While inflation continues to increase broadly and accelerate widely, the increase in Brent oil prices carries on, but oil has been steadily decelerating. The push for inflation to show more broadly cannot placed at the feet of rising oil prices. This leads us to see inflation as becoming more deeply embedded in the economy apart from oil.

Table 1

Inflation spreads across sectors and across sectors by country Table 2 is an attempt to provide a little more information on inflation generally, inflation by sector, and inflation trends across countries. Here I take a look at 12 countries and inflation characteristics for consumer goods, capital goods, and intermediate goods. The table displays median inflation rates for these commodity groups and also shows the propensity for inflation to accelerate across this group of 12 EMU members and associated countries (see table legend) for the various categories of inflation. What is clear is that inflation in the euro area is very widespread. It's widespread across sectors; it's widespread across members, and it's widespread across sectors, member-by-member as well. The more that we disaggregate the data and the more detailed look we take at inflation, the more that we see that it's high and that lends to the view that it's high and it's entrenched. Inflation is higher and running at the highest pace by sector for intermediate goods based on a comparison of sector medians. But inflation pressures are either stuck and stable at very high level by sectors or generally accelerating from 12-months to six-months to three-months.

It's possible, of course, that there are narrow causes of inflation. These narrow causes could be operating in all these countries and in all of these sectors period-by-period. However, it seems unlikely that such narrow specific causes could be the main factors operating; it's much more likely that what we're seeing is the fact that inflation is becoming more deeply entrenched and it's becoming broader and it's becoming more of a problem. That means monetary policy is going to have to try even harder to put this toothpaste back in the tube once it gets started. And it suggests that central banks need to engage the fight sooner rather than later. And the later that central banks act, the higher that rates will have to go to achieve success and the more that monetary policy will eventually become a threat to growth.

Table 2