Economy in Brief

German inflation was zero in September as measured by the HICP. The core measure of the HICP fell by 0.2% month-to-month. These tallies compare to a headline gain in the German domestic CPI definition of 0.3% month-to-month and a CPI ex-energy that rose by 0.2%, also in September.

Sequential patterns The sequential patterns in German inflation differ for the HICP measure and the German CPI measure. The headline shows a 4.4% gain over 12 months, reduced to 3.4% at an annual rate over six months, then picking up to 3.9% at an annual rate over three months. The headline CPI pattern is not that different, with a 4.5% gain over 12 months, a 2.8% annual rate gain over six months, moving up to a 3.8% annual rate gain over three months. For core inflation, the HICP measure shows a steady deceleration from a gain of 5.4% over 12 months to a pace of 3% over six months, down to 2.3% at an annual rate over three months. The German CPI excluding energy posts a 4.8% gain over 12 months, reduced to a 2.5% annual rate over six months, but then creeping up to a 2.8% annual rate over three months. These two measures of the core inflation show steady deceleration for the HICP, while the domestic CPI excluding energy shows inflation moving to a lower range but not steadily decelerating.

Inflation breadth sequentially Diffusion measures the breadth of inflation. These diffusion metrics are formally constructed as half of the number of categories with unchanged inflation on the period and the full proportion of categories with inflation rising period-to-period. If inflation accelerates in half the categories and decelerates in half, the diffusion reading is 50%; if inflation is unchanged in all categories diffusion is 50%. The 50% mark is construed as inflation-neutral. Diffusion calculated on the domestic categories shows that year-over-year inflation rose more prominently with the diffusion measure of 63.6%; that value emerges by comparing inflation over 12 months with the inflation rate of 12-months ago across categories. Over six months, diffusion drops sharply to 27.3%. This measure compares the six-month inflation rates to the 12-month inflation rates across categories. However, over three months even though the headline and core inflation rates do not tick up by very much on the domestic measure, inflation diffusion comparing three-month inflation rates to six-month inflation rates posts a diffusion metric of 72.7%, indicating inflation accelerating broadly over 70% of the categories.

Inflation breadth monthly The monthly data show a slightly better picture looking at the domestic CPI patterns as the month-to-month changes in inflation in July compared to June post diffusion of only 9.1%; the August to July inflation comparisons show diffusion at 45.5%; the September diffusion measure that compares September inflation across categories to August is only at 27.3%. Inflation on a month-to-month basis looks a lot more calming than the three-month to six-month comparison; the latter shows a sharply higher diffusion metric.

Oil prices spurt However, one of the things to bear in mind is that Brent oil prices have been moving up very sharply over all these periods: over 12 months Brent oil prices measured in euros falls 5.3%; over six months oil price rises at a 37.3% annual rate; over three months oil price rises at a 136.1% annual rate! According to monthly data, the month-to-month gain for Brent oil is 4.1% in July, and moves up to 7.6% in August, and by 10.7% in September. So, the oil prices are moving up and this is going to have an impact particularly on the headline inflation for Germany. The knock-on effects to the core, however, are much less clear cut and there’s a good deal of buffering between the headline and the core impact of Brent oil.

Month-to-month changes in annual/annualized rates For the HICP core, however, the 12-month inflation rate has moved sharply lower to 5.4% from a year-over-year rate of 7% in August, and year-on-years rates of over 7% in June and July as well. The six-month inflation rate breaks lower to 3% in September compared to rates of over 5% in August through May and rates much higher for April and earlier. The three-month inflation rate in September moves to 2.3%, compared to 6.4% in August although it compares to even lower three-month rates in the 3.5% to 5% range from July through May. The HICP headline also broke sharply lower in September with the 12-month pace falling to 4.4% from 6.5% in August. The six-month headline pace fell to 3.4% in September from 4.2% in August while the three-month pace fell to 3.9% in September from 6.9% in August. The September 3-month headline pace is still higher than the three-month pace in May, June, and July.

In this week’s letter, we focus on Japan. Investor interest is acute because of the impact of a potential normalization of Japan’s monetary policy, the timing of which is still uncertain. Specifically, we look at recent trends in Japan’s business climate, inflation, and wage growth. We find that while business climate has improved in Japan, wage growth continues to lag inflation, inherently dragging on the Bank of Japan’s (BoJ) desire to see income-led consumption. We also examine Japan’s extensive overseas asset holdings and explore the potential impact on these holdings brought about by tighter monetary policy by the BoJ. We find that while Japan’s investors have been rebuilding their foreign bond holdings over the past year, much of these holdings stand to be unwound should yields at home climb.