EMU PPI Still Runs Hot...But

The euro area total PPI rose by 5.1% in August after rising 3.6% in July. Sequential growth rates continue to run very hot: the three-month growth rate at 49.7% annualized, the six-month growth at 45.3% annualized and the year-over-year growth rate at 43.4% annualized. All are very hot. They compare to a year ago, when the year-over-year growth rate was 13.6%, which is much lower but still considerably higher than what would be construed as consistent with price stability.

Monthly results Components show capital goods prices rose by 0.5% in August, slower than the 0.7% rise in July. Consumer goods prices rose by 0.9% in August, lower than the 1.2% increase in July. Intermediate goods prices were flat for the second month in a row. Manufactured goods prices altogether fell by 0.3% in August and by 0.5% in July.

Sequential trends Sequential prices show capital goods inflation decelerating slightly from 7.8% pace year-over-year to a 6.5% pace over three months although there was an intervening acceleration over six months. Consumer goods prices also show some slight deceleration falling to a 12.5% annual rate over three months after a 14% year-over-year rise, although there too, there's an acceleration to nearly 19% over six months. Intermediate goods prices clearly slow down: the year-over-year increase is 19.9%, over six month the increase is 19.3%, the three-month increase is small at 2.2%, a clear deceleration for intermediate goods inflation. Manufacturing prices also slowed down overall from a 17.4% pace over 12 months to an 18.4% pace over six months to a 3.1% annualized pace over three months. What we see is some evidence of sticky inflation especially for consumer goods but deceleration is concentrated in the intermediate goods area.

That's not surprising because of energy prices weakening. Brent oil prices have fallen, they are falling over three months at a 42% annual rate, this compares to a 7% annual rate increase over six months and the 38% increase over 12 months. However, Brent had been going up previously and one year ago Brent was up by 56% over 12 months. The impact of Brent prices on the PPI lags and that means there should be more inflation good news ahead.

Sequential statistics on inflation acceleration reveal that only 15% of countries show acceleration over three months. 46% show increases over six months while all countries show an increase over 12 months. While the weighted individual component data don't show the decelerations as clearly, the diffusion treatment does appear to be a countrywide phenomenon. And for the time being, it's concentrated in intermediate goods, not as prevalent for capital goods or consumer goods.

The table below breaks out three commodity categories for countries that allow permit this to be done. These are unweighted statistics of pooled data across these eleven countries. They show that in August inflation diffusion had fallen sharply for consumer goods to 18% from 54.5% in July and 27% in June. The median consumer price increase across this group of 11 countries in August was 0.9%, just slightly lower than July's 1% and June's 1%. From 12-months to six-months to three-months diffusion (the breadth of inflation) is falling sharply to 10% over three months from 100% in the two earlier periods. Median consumer prices grow at 10.6% annualized over three months compared to 17.8% over six months and 13.9% over 12 months. Based on pooled data, consumer inflation does show some tendency to decelerate.

Capital goods show diffusion values of 45.5% in August, below 50%, indicating that there's more disinflation than inflation in August. That compares to acceleration and a 63.6% reading in July: the 27.3% reading in June shows disinflation in the month again. The median increase for this pooled group of countries is 0.4% in August, the same as in July and the same as in June. Sequential growth rates show that capital goods diffusion has fallen from 90.9% over 12 months to 54.5% over six months to 18.2% over three months which is a low diffusion figure. The median inflation rate for capital goods has fallen from 8.3% over 12 months and 8.5% over six months to 5.4% over three months. Inflation slows for capital goods, too, both for the median gain and based on diffusion.

Intermediate goods show more dramatic results although they still show high diffusion (inflation breadth) in the current month at 81.8% but that's up sharply from 18% in July and 9% in June. The median increase in August is 0.4%; it compares to a decline of 0.3% in July and an increase of 0.5% in June. The real action for intermediate goods isn't in the monthly results but in the sequential growth rates where diffusion is 80% over 12 months, falling to 70% over six months and to zero over three months. The median inflation reading for intermediate goods falls from a 19.8% annual rate over 12 months to a 19.1% annual rate over six months to a 2.5% annual rate over three months, a very sharp deceleration over three months.

These results are not exactly 'robust.' Different treatments of the data show different trends. Yet, it's quite clear that there is some deflation in the making. With oil prices now falling, it's clear that some of this is going to continue for a while because all prices are significantly related to oil at the PPI level. The main impetus for price disinflation is in intermediate goods where the oil price effect is the strongest. However, we also see declines in capital goods inflation which is relatively more insulated and in consumer goods as well.

It looks like the inflation worm is beginning to turn; however, it's too early to say how significant this is going to be and whether it's going to permeate the core inflation measures as well as the headlines. For now, core prices have increased slightly in August rising 0.7%, up from a 0.5% gain in July. Sequential core inflation hasn't moved very much; up by 5.2% over 12 months, up to a 5.9% pace over six months and then slowing slightly into a 5.5% pace over three months, which is still above the 12-month pace. It's too early to get a reading on what's going to happen with core prices. And, of course, as always, we're more interested in the HICP and what's going on with the CPI, the expressed measures that the European Central Bank targets at a pace of around 2%. PPI trends, however conjured, still are not close to that objective.