Inflation Is Not Falling in EMU Any More

EMU inflation rose by 0.2% in December after gaining 0.1% in November and rising by 0.3% in October. The headline rate is up for three months in a row. The year-on-year pace is 1.7% in September, rises to 2.0% in October, to 2.3% in November, and then to 2.5% in December. These are small changes to be sure, but it is a clear adverse trend.

EMU-wide core inflation fell from 3.3% year-over-year in February 2024 to 2.9% in March 2024. For March onward, the core rate has fluctuated between 2.8% and 3.0% - nine months running with the December core reading as yet unavailable.

While headline inflation appears to be toeing the line on inflation, the core is stuck nearly a percentage point higher. But growth in the EMU area is weak and the ECB has been cutting rates largely without opposition in this environment.

The trends are more convoluted. In the table, the country level data among large EMU members shows headline HICP rates are accelerating over three months compared to six months. In Germany, inflation accelerates over six months compared to 12 months and over three months compared to six months. Only Italy shows headline inflation lower over three months than it is over six months and in the case of Italy inflation is falling at a 1.6% annual rate.

Core inflation or ex-energy measure are in the table for Germany, Italy, and Spain. Italy and Spain show core inflation decelerated to a sub 2% pace over three months. But in Germany, ex-energy inflation is stubborn at 3.1%, the same as its six-month pace.

In the background, oil prices are sliding. They fell in December and in October but rose month-to-month in November. Brent oil prices are falling over three months, six months, and 12 months. The weakness in oil prices is at least one reason to look for more price discipline to lie ahead. Another reason, of course, is the ongoing economic weakness in Europe.

The table can only speak to the facts, the data, and the trends. Over 41 of the past 42 months, EMU headline inflation (year-over-year) is over the 2% target. Over these months, HICP inflation has averaged 5.2%. It’s a good reason to want the ECB to actually get the inflation rate back to the 2% target. However, prior to COVID, the EMU had been undershooting its inflation headline target enough that the average inflation rate since January2012, a period chosen because it is the period over which the U.S. chose to adopt inflation targeting, both the Fed and ECB have inflation averaging an annual rate of 2.2% in terms of their respective targeted inflation variables.