Economy in Brief

Inflation in EMU The recent inflation data in the European Monetary Union is emblematic of the kind of issues that central banks typically have to deal with. Casual central bank observers think of central banks as “leaning against the wind,” meaning that they raise rates when inflation is high and then cut rates when the economy gets weak. Indeed, this is largely what central banks do. However, they also try to be anticipatory when they can, seeking to get ahead of surges in inflation and periods when the economy is going to weaken. It's very hard to forecast those shifts in the best of circumstances, and so a great deal of the judgment that central banks form comes from the near-term trends, even though central banks are aware that the most recent data can also be some of the most volatile and prone to revision. With these sorts of caveats, we look at the recent inflation data from the European Monetary Union, and we see less than straightforward trends.

At its last meeting, the European Central Bank got out in front of events and started raising rates ahead of any action by the Federal Reserve. In June, its year-over-year HICP and core HICP rates both decelerated compared to their May values, with the headline easing to 2.8% from 3.2% and the core to 2.4% from 2.6%. Having inflation rates move in the opposite direction of policy, even in the short run, can create rough sledding for a central bank that is, in any event, trying to look at the broader trend rather than the most recent wiggle in the inflation rate.

The good, the bad, and the unexpected If we go back to December, we see the HICP in the monetary union at 2%, followed by 1.7% in January and 1.9% in February. At that point, things seemed to be well in hand. The problem was that the core inflation rate in December was 2.3%; while it fell to 2.2% in January, it popped back up to 2.4% in February. So, February was one of those uncomfortable months where both the headline and core rates were popping up, but the headline rate was still below the 2% target that the ECB seeks to attain. After February, of course, the world changed; the war in Iran spiked up oil prices and that's when inflation rate in the monetary union rose to 2.6% in March, 3% in April, and 3.2% in May. June inflation has backed down from those higher rates of change; however, conditions in the Middle East that had prompted some release of air from the inflation balloon in June have reversed, and so, the outlook once again is for oil prices to remain high and for inflation to remain troublesome.

Inflation still percolates At the bottom of the table, I show the percentage of categories with inflation accelerating over three months, and since February, that percentage is over 50% in each month. The percentage of categories with inflation accelerating over six months strings out to three months in a row. The decision by the ECB to raise rates is entirely understandable given these trends. In addition, and perhaps less tethered to any particular monetary rule, included in the right-hand column, the inflation ranking in June is compared to data back to the year 2001, a roughly 25-year period. Over this timeline, the headline HICP ranks in the 83rd percentile and the core rate in the 82nd percentile. In both cases, we're looking at inflation being higher only 17% or 18% of the time during this span, which once again marks this as a strong inflation period.

Global trade volumes continue to expand Despite military actions around various geopolitical hotspots, war zones, and other geopolitical tensions, plus the imposition of tariffs, World Trade volumes in dry goods have continued to expand significantly since early 2025.

Exports from the European monetary Union have grown over the past year by 5.5%, while imports have surged ahead at a 14.3% annual rate. The growth in trade is driven mostly by nonmanufactured goods, and this is largely a pricing effect as inflation has remained high and oil prices during this period have risen sharply.

The trade balance and its dynamics The euro area trade balance in May slipped into a deficit of €4.97 billion after having a surplus of only €836 million in April. Over the last 12 months, the surplus averaged €5.7 billion per month. We can build up the trade balance several different ways to explain it. One way to understand it is that there are certain tensions between manufactured and nonmanufactured goods. The balance on manufactured goods trade 12 months ago was an average €36 billion over the previous 12 months, whereas it's currently showing a 12-month average that has fallen to a €26 billion surplus. However, all of the trend changes appear to have occurred between a year ago and earlier this past year, since the 12-month, six-month, and three-month averages, as well as the stand-alone reading for May, show manufacturing surpluses in the neighborhood of €25 billion. For nonmanufactured goods, 12 months ago the average monthly deficit was €22.8 billion, whereas over the last 12 months the average has been about €20.2 billion; that's a slightly smaller deficit. The sequential nonmanufacturing deficit balance, however, crept up through the course of the last 12 months, and in May it registered a €30.95 billion deficit. Erosion in the deficit position of the euro area is significantly based on an increased deficit in nonmanufactured goods.

Aggregate trade flows show exports accelerating from 12-months to six-months to three-months, with the same progression for imports, except that the import growth rates are substantially higher than for exports. Exports of manufactured goods accelerate from 12-months to six-months to three-months, but the exports of nonmanufactured goods are stronger and accelerate much more on that same timeline. Imports show manufactured goods in a relatively weak acceleration mode from 12-months to three-months as well. For nonmanufactured goods, the import growth rates post incredible results; they're extremely strong. This, of course, is mostly a pricing effect reflecting the impact of oil prices.

The table includes a few bilateral comparisons. Germany shows accelerating imports, and while there's steady growth in exports, they're not accelerating the same as imports. For France, exports accelerate quite strongly while imports accelerated, but with much less vigor. Much of this has to do with France’s greater reliance on nuclear power as France gets about 65% or more of its electricity from nuclear energy compared to only 11% for Germany, which has cut back and is transitioning away from nuclear power, making it more dependence on other energy sources and boosting energy imports. U.K. exports and imports are both showing growth, but there is no clear trend.

The table also presents export data for five European nations. Exports accelerate for each of them except for Italy, where exports are in a markedly different and decelerating pattern.

On balance, trade trends are in flux although manufacturing trends seem to be quite stable. Volatile oil and other commodity prices are causing severe swings in trade flows across Europe and certainly globally as well. With the situation in the Strait of Hormuz still unresolved, the outlook for trade will continue to expect volatility.

Industrial production in the European Monetary Union (EMU) shows only a very minor and idiosyncratic sector acceleration in the nondurable goods sector. Other sectors show trends that are not focused and drift into random variability. Nondurable goods output shows growth of -10.9% over 12 months, improving to a pace of -9.9% over six months annualized and improving further to -8.7% annualized over three months. The irony is that nondurable output is contracting over all these periods, but the contractions are becoming slightly less virulent. It is nothing to base any optimism on despite the technically ‘improving’ trend.

Total output and manufacturing output in the EMU each show strong gains annualized over three months after declines on balance over six months and 12 months.

While the secular trends are not clear in showing persistent accelerations or decelerations for the most part, it's true that output across the consumer industries continues to show contraction on all timelines. When we move to intermediate goods and capital goods, we're looking at output showing increases over 12 months, six months, and three months. Even if there are not clear progressions, the persistence of output gains is notable. This again underscores the extent to which expansion is being carried ahead by business and not by the consumer, even in Europe.

On a quarter-to-date (QTD) basis (two months into the second quarter), output is generally showing increases, with the exception of consumer durable goods showing an output decline at a 2.4% annual rate. Top-line growth is still very unimpressive, with total industrial production at a 0.6% annual growth rate and manufacturing alone at a 0.4% annual growth rate; neither of these is strong, solid, or impressive.

Turning to the percentile standing data that evaluate the strength of year-over-year growth on a historic timeline, we see that manufacturing and total output growth log percentile standings just below the 30th percentile. Consumer goods, as an aggregate category, have a 1.3% standing, which is extremely weak. That standing consists of a 29% standing for consumer durables and a 1.3 percentile standing for consumer nondurables output.

Once again, it is intermediate and capital goods that are the backbone of support for output. Intermediate goods’ annual growth rate has a 63-percentile standing, and the year-over-year growth rate for capital goods has a 52.9 percentile standing. Both being above the 50% mark puts them above their median for the period of analysis; that period extends back to August 2006, roughly a 20-year period.

I previously reported on the country detail. The country detail shows accelerating manufacturing output in Ireland, Portugal, and Sweden (Sweden that is not a monetary union member). Austria, a monetary union member, shows persistent deceleration, while the rest of the countries in the group show somewhat chaotic patterns.

While the percentile standing for year-over-year growth in manufacturing is at the 27th percentile mark for the whole of the monetary union, that amalgamation includes size weighting for that evaluation. If we take the unweighted averages for the percentile standings for 11 of the oldest monetary union members, their average individual ranking is much higher at a 48.3 percentile mark. Clearly, there are great differences by country across the monetary union, and this gives the ECB an additional headache in trying to make one monetary policy for such a varied group of economies.