German Inflation Accelerates on Narrow Breadth

German inflation accelerated in June rising by 0.7% month-to-month compared to falling 0.2% in May. The HICP core rate rose by 0.8% after a flat performance in May. The pattern for the HICP inflation rates in Germany’s domestic CPI headline and core, while showing similar trends to the HICP, also shows very different magnitudes. The German CPI accelerates to 0.3% in June after falling by 0.1% in May. The CPI excluding energy rose in June by 0.4% after being flat in May. The accelerations experienced in the domestic indexes month-to-month are far below the accelerations experienced in the HICP measure.

Inflation diffusion as the arbiter The table calculates diffusion data based on the domestic CPI data. Diffusion data look across the various categories and calculate the breadth of the price increases period-to-period. The diffusion data presented in the table follow the practice for the U.S. ISM where diffusion is calculated as the percentage of inflation increases month-to-month plus half of the percentage that are unchanged. Inflation diffusion above 50% indicates that there is more acceleration than deceleration on the period. Below 50% there is more deceleration than acceleration across CPI categories. Inflation diffusion in April month-to-month was very narrow even though the headline showed that the domestic CPI rose by 0.1%; diffusion in April compared to March was only at 9.1%- extremely little inflation acceleration occurred in the month. However, diffusion stepped up sharply to 54.5% in May. This indicates inflation was accelerating in more categories than it was decelerated but by a very small margin. And this is even though, in May, the headline for inflation fell month-to-month after rising the month before. Essentially the diffusion calculation from May was saying that the headline exaggerated the beneficial trend for inflation. And that turns out to be true. In June we see the inflation metrics indicating a 0.3% headline gain and a 0.4% gain in the CPI excluding energy. But once again inflation diffusion remained at only 54.5%, barely showing inflation accelerating in more categories than it was decelerating. On balance, despite the headlines on the HICP, German domestic inflation data suggest that inflation is not increasing by much month-to-month. It sees June more as a hiccup in inflation. The HCP measure appears to be exaggerated. Supporting this view, Brent energy prices fell in each of the last two months as well.

Sequential trends Sequential data that measure inflation over 12 months, 6 months and 3 months on the HICP shows that there is a steady deceleration of headline inflation from a 6.9% pace over 12 months to a 4.3% pace over 6 months to a 2.9% pace over 3 months. This deceleration is echoed by the HICP core measure.

The German domestic CPI measure also shows inflation decelerating with the headlines displaying 6.4% inflation over 12 months, a 5.7% pace over 6 months, decelerating to 1.4% pace over 3 months. And like with the HICP core, the CPI excluding energy also shows inflation decelerating, in this case, from 6.7% over 12 months to a 4.9% pace over 6 months to a 2.1% annual rate over 3 months.

Sequential diffusion Diffusion data are calculated from the domestic CPI data. They show inflation over 3 months with diffusion at 27.3%; this compares the 3-month inflation rates across CPI components to their performance over 6 months. Over 6 months diffusion is 36.4%; this measure compares 6-month inflation rates across components to component inflation over 12 months. Over 12 months the diffusion measure is hot, showing a 72.7% pace; this compares inflation by category over 12-months to what it was across components 12-months ago. Interestingly, the comparison of 12-months to 12-months ago shows a headline of 6.4% over 12 months as of June 2023; this compares to 6.6% twelve-months ago. The CPI ex-energy is at 6.7% over 12 months currently, compared to a 4.4% twelve-month pace twelve months ago. The diffusion measures confirm and reinforce the notion from the HICP headline and core and from CPI headline as well as ex-energy measure that inflation has been decelerating and that the deceleration is widespread.

The bottom line: still not enough progress These results suggest that the June increase in the HICP data do not represent an authentic or worrisome trend for Germany. Inflation has been coming into line and it looks like it continues to come into line. The ECB, however, makes monetary policy off year-over-year inflation rates and those remain elevated with a 6.9% HICP headline and the domestics CPI measure at 6.4%. The core rates in both cases show even higher inflation over the past year. While we can say that the June data should probably be set aside, in some sense, we're not saying that inflation is totally tame or that Germany is back on the path where it needs to be. That's always hard to tell when inflation begins to edge down… how much weight to put on short-term inflation indicators is a judgement call at best. Inflation can be volatile and process of accelerating and decelerating is not always well-behaved. Volatility can always emerge. But the diffusion data from Germany suggest that the deceleration of inflation across categories is authentic and this is not some episodic statistical quirk that has occurred. Rather inflation really is coming into better balance for Germany even though June produced an HICP with a very uncomfortable result. The out-sized year-over-year gains will continue to be the focus of ECB policy. They must move into alignment to satisfy the ECB. That is still way off.