PPI Remains Weak in Germany in October; Maybe It Will Continue

Price weakness is the rage this year - Price weakness is all the rage globally. Just as inflation had surged unexpectedly, it has declined faster than expected with policymakers glad for the turnaround but still not quite sure what to make of it. Globally in the US and in Europe the end of rate hikes by central bankers is being proclaimed by various market participants. And that may be true. But the featured consumer price measures continue to overshoot their targets and only some of the very short-term inflation calculations begin to be anywhere close to what central banks target. Is that good enough?

Germany to shrink again - The Bundesbank looks for the German economy to shrink again in the fourth quarter. While the German economy is not out of the woods, the Bundesbank sees signs of progress that foreign demand weakness may have bottomed out. Economic weakness has not been rampant in Germany but rather ‘flirtatious.’ GDP rose by 0.1% in Q2 and fell by 0.1% in Q3 with another decline ahead. The economy has looked more like it’s in an episode of weakness and stagnation than in an actual downturn. The US, in this business ‘cycle’ episode, has already posted two consecutive quarters of negative growth (mildly negative growth) but at the same time it was creating a prodigious number of jobs, leaving no doubt that whatever THAT was, it was not a recession. The same seems true for Germany and Europe currently. Nothing yet looks much like recession.

You can tame a lion but it’s still not a house pet - Inflation, however, is being tamed. But as the table above shows (Table 1) German CPI inflation still runs 3.7% over 12-months and at a pace of 3.1% over three-months still hotter than the ECB’s EMU-wide goal of 2%. It is tamer by still unruly…

Markets are happy but are they content? For their part, markets in the US and in Europe are happy that inflation is falling. But falling is a ‘direction,’ while the inflation target is a ‘level’ – set at 2%. No one is there yet. Nor is it clear that central banks will get there on their current programs. Although they all continue to express fealty to their respective inflation targets. The US has seen the most rampant attempts to undermine the 2% target with intermediate goals that are higher although the central bank has not approved any of these formally, central bank actions seem quite content to say inflation will remain over-target for some time which seems to be an admission that they have bought into this divisive approach in the slipperiest way possible. In the US Chair Powell continues to express his goal as for the unchanged inflation target of 2%, although he shows no urgency to get there other than eventually raising the question ‘really?’ Are we doing ‘the transitory’ thing again?

When 2% is no longer 2%? - So when is 2% not 2%? When inflation lingers above 2% for 31-months and counting and has averaged a gain of over 5% during the period as in the US? For how long a period can inflation be allowed to ‘overshoot’ before central bank competency becomes an issue? For EMU it has been 30-months in a row and inflation has averaged 7.1%. These are two central banks that continue to boast that they target 2% inflation. In the US the Yr/Yr PCE is 3.4%; EMU’s HICP is at 4.3%. Are we still at 2%? Sorry I was never THAT good at math…I’m confused.

Central bankers walk on eggshells-why? Central bankers have been unwilling to raise rates in step with the demands of inflation containment based on what was best past practice. All central bankers seem to have gotten the ‘religion’ of soft landing, although we have seen about as many soft landings as we have seen unicorns in my lifetime. That certainly is true if we apply the concept to bringing inflation down to 2% after the kind of inflation overshoot, we have seen in this cycle. Some will take odds with the notion that we must ‘pay a price’ for price stability. There is now a belief that we can have our cake and eat it too. However, if we step back from all the wishing and hoping unsupported by fact, what is left is a dangerous posture on inflation Vs an attempt to keep unemployment rates at levels that historically have not been able to endure. The question is how much should we sacrifice known principles of monetary discipline to try to preserve unemployment rates that have never been able to sustain themselves at this low level? To whom does that seem a ‘good bet?’

Ah…but the PPI behaves! PPI inflation is again very good news in Germany. The EMU data lag the German data by a month and there we see the discipline comes mostly from raw goods and weak commodity prices – the same as for Germany. Oil prices have been a surprise with Russia and OPEC trying to engineer higher prices with output cutbacks that have not been successful as global weakness has dominated the oil market more than the OPEC/OPEC-plus output reductions. But oil price effects come and go. Central banks can’t make their inflation progress wholly on the back of commodity prices.

Not the cat-bird seat but so far so good - For now the global economy is in a weak spot for demand and it could even prove to be a period of cumulative weakening and could emerge as the recession that central bankers are still working so hard to avoid. There have certainly been enough recession signals and markets are now busy shunting them aside and pretending to have dodged the recession bullet. And maybe they have. And maybe they have not… ‘maybe’ is exactly that kind of word. It is one of the few words you can use to express agreement when you really want to express disagreement but do not want to be confrontational or tell a fib. And you can do it even without tipping your hand. So maybe central bankers are right…