German PPI Logs A Strong Headline; A More Tempered Gain Excluding Energy

Germany's PPI for September excluding construction rose 2.4% after a 7.9% monthly gain and in August and a 5.3% monthly gain in July. The three-month growth rate for the headline PPI is an astounding 83% annualized, as well as a 49% annual rate over 6-months and a 45% annual rate over 12-months. However, 12-months ago the year-over-year rate was rising at a 66% annual rate. Germany has been fighting off this headline inflation problem from the PPI for quite some time.

The ex-energy inflation rate is much better behaved, but not without its problems. The PPI ex-energy rose by 0.5% in September after a 0.4% gain in August and in July. Over 3-months it's rising in a 5.1% annual rate, compared to an 11% annual rate over 6-months and a 13.8% annual rate over 12-months. One year-ago the PPI excluding energy was rising at an 8.6% annual rate.

The PPI is a significant price index, but the Bundesbank is ultimately more concerned about what's going on with the CPI and, of course, the target rate for the European Central Bank for setting European monetary policy involves the HICP, a consumer price rate.

Table 2: CPI and PPI and Brent

In September, the CPI rose by 2.1%, after a 0.6% gain in August, and a 0.5% gain in July so it's 3-month pace is much lower than for the PPI at a 13.7% annual rate, a 6-month rate at 8.8% and a 12-month pace of 9.9%. One year-ago the CPI was rising at a 14.5% annual rate. The CPI excluding energy was up by 1.4% in September, by 0.6% in August and 0.6% in July. That amounts to an 11% annual rate over 3-months, a 7.8% annual rate over 6-months and a 6% annual rate over 12-months. One year ago, the CPI was rising at a 9.3% annual rate. So, the pace of the CPI gain is less than it was one year ago, however, from 12-months to 6-months to 3-months it's accelerating the same as the PPI. The CPI excluding-energy is also accelerating from 6% over 12-months, to 11% over 3-months but for the PPI ex-energy, there's deceleration in train from a 13.8% annual rate over 12 months to a 5.1% annual rate over 3-months.

During this period oil prices have been rising very sharply. The PPI headline has a 0.52 correlation with Brent and a 0.45 correlation between the change (percentage) in the PPI and the change (also percentage) in Brent. Excluding-energy, the PPI has a 0.45 correlation with Brent price index to price level while the percent change has a 0.52 correlation. CPI correlations to Brent are lower with level-to-level correlation at 0.37, while the percent change correlation is 0.50. The CPI ex-energy has a lower 0.28 correlation to the level of Brent and a 0.16 correlation between the ex-energy CPI change and the change in Brent. The PPI has the strongest correlations to Brent. The CPI correlation drops sharply form the headline to the ex-energy comparison.

Table 3: Ex-energy: PPI Vs CPI

Table 3 takes Brent out of the equation and compares the PPI to the CPI looking at the correlation between the ex-energy portions of the two indices. The PPI ex-energy is correlated to the ex-energy CPI with a correlation coefficient of 0.89, relatively high. However, you can see in the table the PPI is also much more volatile than the CPI; the ex-energy PPI has a standard deviation of around 4% whereas the CPI excluding energy has a standard deviation of around 1%.

Looking at percent changes in these two ex-energy indices over more than one year- over two years and three years- the two-year correlation is 0.89; the 3-year correlation is 0.84 so these correlations hold up over time. This isn't simply a year-to-year correlation the fact is that the CPI and the PPI excluding energy both are relatively highly correlated and seemingly send the same signal on inflation.

Energy prices remain high; however, they have been moving to lower levels recently. But then there was an OPEC-plus meeting that cutback output whose goal is to boost prices back up. And, of course, Europe shut down in the pipelines from Russia and no longer has that source of energy. Europe is going to continue to have a problem with gas and energy problems generally going into the winter. Making energy problems a little bit worse in Europe, Russian attacks on civilians have focused on energy generation plants in Ukraine. Ukrainians may have a special problem creating heat and electricity in the winter; the impact that that will have on energy prices at this point it's hard to tell.

However, these correlations tell us that, while there are different correlations between the PPI and Brent and the CPI and Brent, the relationship between the ex-energy PPI and ex-energy CPI remains relatively strong. There is substantial relevance of what the PPI ex-energy is doing for the CPI. Even though the CPI ex-energy is showing acceleration it's good news that the PPI excluding energy is showing deceleration. The deceleration in the PPI excluding energy leaves some hope that the CPI acceleration may be short lived and there may be some further price discipline coming for the CPI in coming months because of its correlation to ex-energy PPI prices. We see enough in these correlations to know that the PPI is relevant for the CPI particularly when we compare the ex-energy portions. Over the most recent three months, the ex-energy PPI has some good news for the outlook for the CPI.