PPI Inflation Has Been Rising But Is Still Moderate

PPI inflation was up by a strong 1.2% in January after rising by 0.4% in December. Headline inflation is accelerating sharply from 1.9% over 12 months to a 4.1% pace over six months to a 12.9% pace over three months. However, core inflation in the EMU has been much more tempered and steadier. Core PPI inflation in the European Monetary Union (EMU) is up by 0.2% in January, the same as in December. Core inflation has been relatively steady at 2.7% over 12 months and a bit weaker at 2.4% over six months and at 2.6% over three months. It’s above the ECB targeted pace, mildly above the pace that the ECB sets for the HICP, but still only a moderate overshoot.

The table on PPI inflation rates sequentially shows that inflation on the PPI gauge has been flaring sharply across members of the EMU and in other non-EMU countries. Annualized inflation ranges from a low of 0.9% over three months in Austria to 67.6% in Ireland. 84.6 percent of the reporting countries in the table show accelerating inflation from 6-months to 3-months; in fact, inflation has been accelerating from 12-months to 12-months ago and over 6-months vs. the 12-month pace.

The average annualized inflation rate rises from 3.6% across countries (unweighted) over 12 months to 7.4% over six months to 18.3% over three months. The price action for the EMU (top of the table) is a bit softer because that process uses a GDP weighting scheme. But the signals are much the same.

In context, we see a much more stable core environment also reported near the top of this table. I use Germany as an individual example. Its gauge for the PPI excluding energy rises by 1.3% over 12 months, then at only a 0.5% pace over six months. Over three months, German ex-energy inflation is at a 1% pace. The moderation in core inflation stands in marked contrast to headline inflation.

Oil prices show recent pressure from Brent in the table over three months. However, Brent is still lower on balance over 12 months and six months.

EMU PPI inflation is not a reassuring report. Inflation is flaring sharply across the community for the PPI. However, this is mostly headline inflation, energy and commodities are driving this performance. Core inflation or ex energy inflation metrics show much more tempered and stable inflation. There is a good chance that this current spike will simply pass. Oil prices in markets today – live market prices- are actually weakening suggesting that the bubble in oil prices will not have lasting impact on the PPI. Short-term inflation trends are volatile and are not to be trusted. And the PPI is as guilty on this score as any price index.