EMU PPI Pressures Intensify Except for Intermediate Goods

The PPI inflation backed off its obvious blow-out gain of 5.1% in August to score an increase of 1.3% in September – still sizeable. The headline PPI (PPI excluding construction) is up by 42% over 12 months, up at a 33% annualized pace over six months and up at pace of 48% annualized over three months. Only Italy, Austria, Luxembourg, and Belgium have a lower year-on-year inflation rate in September than in August.

Goods news... Capital goods and consumer goods prices post strong annualized gains over 12 months, six months, and three months, with both sectors showing a small let up over three months. It's not enough of a step-down to call it a real change in trend. But for intermediate goods the 12-month gain of 19% dwindles to an annual rate of 13% over six months, then plunges to an annual rate gain of 1.1% over three months. That's good news.

Manufacturing goods prices also show a step down from 17% to 10% to -1.4% at annual rates from 12-months to six-months to three-months -more good news there.

Bad news... But core EMU prices (prices excluding tobacco, alcohol, food, and energy) show steady annual rate acceleration from 5.7%, over 12 months to 6.7% over six months, to 7.9% over three months. And that is not good news - in the face of the other trends - it's particularly bad news.

Lower energy prices are no panacea That's a complication. Clearly energy prices have broken lower. Brent oil prices are up by 20% over 12 months but falling at an annual rate of -36% over six months and by -65.5% over three months. This is a major factor behind the de-escalation of intermediate goods inflation, but that has not spread so much to other sectors yet and as of yet, not a factor in the core at all.

The table below calculates inflation DIFFUSION across ten EMU members. If, for example, capital goods inflation rises in all countries, diffusion for that period is 100%. If it rises in no country diffusion is 0%. The table presents both inflation (median inflation for each sector among group members) and diffusion for various horizons for sector across countries. The statistics are based on unweighted (median) underlying data and simply seek to identify the breadth of trends not to weight them fore country size- that is done already in the EMU PPI measure.

The sequential data (12-months vs. 12-mo previous, 6-months vs. 12-months, and 3-months vs. 6-months) show inflation within each sector steadily accelerating, with intermediate goods showing the fastest deceleration- a result in line with the weighted EMU results.

Consumer inflation decelerates from a 15% pace over 12 months to a 10% pace over three months, but more striking is that diffusion across the countries shows acceleration over 12 months (compared to 12-months earlier) up in all countries while over three months none of the countries shows an acceleration in consumer price inflation (compared to six months).

Capital goods inflation falls from 8% over 12 months to a 6% pace over three months. Over these two periods diffusion falls from 91% to 27% over three months.

Intermediate goods show 12-month average inflation for the group at 19% compared to 2% over three months. On that comparison, diffusion falls from 70% to zero.

Summary Inflation trends show a good deal of consistency and uniformity – that adds to the sense that these trends are true. And yet, there are also some significant mixed signals. This discrepancy cautions us about how we should apply the message form these results. Unweighted country level data show inflation by sector abating and abating broadly across these ten members. Inflation across members by sector shows the least fall for consumer goods then capital goods with the largest drop-off in intermediate goods. These trends echo the trend in the weighted EMU data, reinforcing our confidence that the trends are real.

Conclusion: more work to do But the fly in the ointment is EMU-wide core inflation. When we strip out the main drivers of falling intermediate goods inflation, and look at the core, inflation no longer is abating but it is accelerating- clearly accelerating. The core rate accelerates from a pace of 5.7% over 12 months to 7.9% over three months. This a significant contrast and discrepancy with the headline and sector trends. It injects a note of caution into my willingness to embrace the preponderance of good news on decelerating inflation across sectors. Falling oil prices have not yet carried the day to lower inflation across the EMU. There is some of that effect present. But it is too soon to declare victory or even to treat inflation as if it is on run. Progress is being made, but there is more work to do.