German HICP Continues to Post Large Gains

German inflation continued to run hot in February. The HICP gain in the month of 0.6% was stronger than January's 0.4% while the core rate accelerated to 0.7% from January's 0.3%.

Overview- Germany logs a year-on-year HICP gain of 9.2% in February which is stronger than January's 9.1% but lower than its string of increases from September to December of last year; a string in which the German headline year-on-year inflation rate peaked out at 11.5%. The core year-over-year rate of 7.4% in February is a sharper rise than its 7.0% year-on-year increase in January. That marks a new cycle high for the annual core inflation rate! That's certainly not a good development for inflation prospects in Germany.

HICP some deceleration some mixed performance- However, because of a slowdown and, in fact, the decline in the headline month-to-month HICP in December, Germany's headline inflation rate shows deceleration in its broader sequential trends. Its 9.2% gain over 12 months softens to 8.9% over 6 months, and over 3 months the annual rate increase is at just 1.6%. The core rate is a bit less cooperative with a 7.4% gain over 12 months rising to an 8.7% gain over 6 months but edging down to a 5.9% annual rate over 3 months.

CPI excluding energy- Germany's domestic CPI measure shows a similar deceleration in the headline. But for the CPI excluding energy the German domestic CPI shows a year-over-year gain of 7.6%, rising to 8.3% over 6 months and then falling back only to a 7.1% annual rate over 3 months. That 3-month pace for the CPI excluding energy is below the 12-month pace, but the 7.1% compared to 7.6% is still not much progress and still a very high rate of inflation for an ex-energy measure.

Diffusion of inflation monthly- On balance, the German headline and core trends are not very encouraging this month. Looking at the diffusion that measures the tendency for inflation to accelerate, there was a great step down in December where diffusion fell to only 9% which means 91% of the categories were showing inflation decelerated in December compared to November. in January diffusion stepped up to 36% and in February it stepped up again to 45%. But both these gauges show that inflation is accelerating month-to-month and in fewer than half of the categories. These calculations do not use any weighting.

Sequential diffusion- Sequentially the diffusion indexes show that inflation is accelerating over 12 months compared to 12-months ago in about 82% of the categories. Over 6 months inflation is accelerating compared to its 12-month pace in about 64% of the categories. Over 3 months inflation has accelerated in only about 45.5% of the categories. Still 45.5% is not that decisively below the break-even which is at 50%. Diffusion trends are somewhat encouraging but given the height of inflation I would mark them as still inadequate.

Oil prices- Underlying a lot of what's going on with inflation is oil prices and we have Brent prices denominated in euros memorialized at the bottom of the table. Brent prices are down compared to a year ago by 5.9%, they're down over 6 months at a 34% annualized rate, and they're down over 3 months at a 42% pace. Monthly data show Brent prices fell by 13.6% in December, they rose month-to-month by 1.4% in January and then they fell by just 0.3% in February. The help on inflation reduction that's been coming from oil prices appears to be diminishing substantially for Germany. Meanwhile, inflation diffusion while showing some deceleration is not showing very impressive results.

Summing up- Germany is having some additional problems having switched over to green fuel and has run out of green sources. It has started to burn coal in order to generate power. This, less-than-green development, of course, is an upshot of the loss of the pipeline energy form from Russia since the war with Ukraine began. Of course, in the wake of the pipeline explosions, Germanys options are limited. Inflation in Germany and in Europe continues to run hot. So far, we would have to mark the inflation progress as disappointing. Meanwhile, in the U.S., evidence of inflation slowing has become mixed. The U.S. economy continues to churn out jobs in massive numbers and to defy any clear signal of economic slowing. The Federal Reserve continues to be on the hot seat and is leaning to raise interest rates more and perhaps to raise them at an expedited pace in the wake of the Fed Chairman’s testifying before Congress where he encountered a great deal of political pressure. It's an extremely difficult environment for all central banks.