Year-on-Year EMU HICP Settles Lower But Pace Remains Hot

In January the HICP for the European Monetary Union rose 8.7% year-over-year, down from its 9.3% year-over-year gain in December. This is the mildest 12-month gain since it rose by 8.7% in June 2022; the pace was last lower in May 2022 rising 8.1% year-over-year. Similarly, the six-month inflation rate fell to 7.3% in January from 7.9% in December. This is its slowest pace since December 2021. The annualized three-month gain in the HICP is just at 3.2%. That is sharply lower than December's three-month rise at a 6% pace and it's the slowest pace since June 2021 (2.9%). But since the drop in the three-month pace from December to January is so sharp - just about having the pace from 6% to 3.2% - we should withhold judgement about the durability of this slower pace. For one thing, three-month growth rates are less reliable than the longer-term growth rates. Also, this is headline inflation and we have seen some increase in energy prices on global markets recently. The slowdown in the three-month pace may not be something you can take to the bank.

Somewhat mixed results: The inflation numbers for the month are at the same time encouraging and discouraging. Over five years the HICP average is rising at an average of 3.4%, which is well above the target rate of 2%; while the core rate, at 2.2%, is not very far from the target. This highlights the fact that much of the inflation has been in those components that are in the headline and not in the core. Food & energy prices have soared during this period. For much of the rest of the HICP, there has not been as much elevation although that's not to say the core prices are currently well behaved. They are not.

Core inflation trends: The core rate for the HICP is plotted in the chart showing its progressive growth rates. The growth rates are annualized over three months, six months and twelve months. Over three months, the core inflation rate ticked higher in January to a 5.2% pace from a 5.0% pace in December, but that's still much lower than November's 5.8% pace and below the 6.3% annual rate the three-month inflation rate peaked at in September of last year. However, both the six-month and the twelve-month inflation rates are reaching new cyclical peaks in January. The six-month inflation rate is 5.7%, up from 5.6%; the twelve-month inflation rate is at 5.2%, up from 5.1%. Still, as the chart shows, there has been a slowing or flattening out of the acceleration in the pace of inflation as measured by the core.

Disappointing on balance: The finalized European Monetary Union inflation rate for the month has to be regarded as disappointing. There is some deceleration of inflation on a three-month basis, but that, of course, is the most mercurial inflation rate as a chart also demonstrates. The more stable six-month and twelve-month inflation rates are continuing to reach new highs although the rate of increase of inflation on both of those gauges has slowed and that much is good news. But markets are longing for central banks to peel back rate hikes. And these are not the kind of developments that are going to cause central banks to peel back rate hikes.

The bottom line: In the European Monetary Union, the bottom line is that headline and core inflation continue to run hotter than the target and by a considerable margin. There is some evidence that the inflation pressures are abating. Inflation is not accelerating the way it did earlier in this cycle. However, there is scant evidence to suggest that inflation is falling and certainly no evidence that it's falling in a way that the ECB can depend on that sort of trend to change policy. Inflation still has a lot of work to do and has a lot to show the central bank before it can be sure that policy has done enough to put inflation on the right downward path. For the time being, inflation's path remains up. And that is the disappointing conclusion of this report.