Economy in Brief

Manufacturing and Services The INSEE surveys for France in September rose for manufacturing while it remained dead flat for services. The manufacturing survey rebounded to 98.6 in September but was still below its July value of 100.7. The manufacturing rebound in September is limited; activity remains weak, historically at a percentile standing of 31.3% in the bottom third of historic observations.

Manufacturing Climate and production- Manufacturing production expectations in September remained negative but improved to -6.2 from -9.0 in August. The recent production trend worsened, falling to -6.3 from -4.0 in August. However, respondents referring to their own industry reflected a ‘personal likely trend’ that's much stronger at 14.1 compared to 2.5 in August. Survey respondents are downbeat on manufacturing overall, but upbeat on their individual sectors. That's a divergence worth watching. And it's also a rather significant divergence because the standing for the recent industry trend is at its lower 15th percentile whereas the standing for the ‘personal likely trend’ is at its 77.7 percentile. There's an extreme chasm between what respondents think is going to happen to industry overall compared to their optimism on their own individual surveys. Is it optimism or denial? Those two readings on ‘likely trends’ compare to an overall manufacturing production expectation that has a 39.7 percentile standing. That standing is below its 50th percentile, below its median, and weak.

Orders and demand- Orders and demand are little-changed month-to-month in manufacturing. The September value is -21.4 compared to -21.2 in August. For foreign orders & demand, there is slight improvement to a reading of -13.9 in September from -15.1 in August. The percentile standing for overall orders & demand is a 32.8 percentile standing and that compares to a 44th percentile standing for foreign orders & demand; both are below median values, and both are weak.

Inventories- The response for inventory levels declined slightly in September to 14.8 from 17.8 in August, but these are strong values with 87-percentile standing for the September value.

Prices- Prices show increased pressure month-to-month with the ‘own likely price trend’ moving up to 5.2 in September from 2.2 in August compared to the manufacturing overall price trend that moves up to 8.9 from 5.0 in August. The ‘own likely price trend’ in September is still below its July value, whereas the manufacturing price level in September is assessed at twice its July level. The standing for the ‘own likely price trend’ is a 55.9 percentile standing, compared to a below-median 46.2 percentile standing for the manufacturing price level. While the assessment of manufacturing prices is below the assessment for the ‘own unlikely price trend’ the two standings aren't all that far apart.

The U.K. inflation reported in August paints a familiar picture of the trend for inflation. The CPIH measure rose by 0.4% after falling by 0.1% in July. The core measure excluding food, energy, alcohol, and tobacco was flat in August after rising 0.5% in July. Among the ten major headlines reported for U.K. inflation, the price level change accelerated in only four of them in August compared to July.

Sequential inflation Sequential inflation in the U.K. as measured by the headline rose by 6.3% over 12 months, decelerated to a 4.6% annual rate over 6 months, and decelerated further to a 2% annual rate over 3 months. For the core rate, inflation rose 5.9% over 12 months, accelerated to a 6.2% annual rate over 6 months, and then fell sharply to a 3.2% annual rate over 3 months.

The odd tale of core inflation The tracking of the core inflation rate by 3-month, 6-month, and 12-month calculations is presented in the chart at the top of this report, and it's clear that the 3-month inflation rate, even for the core, has broken sharply lower. For the 6-month rate, there is a more complicated bump-up in inflation before it begins to decline, leaving the 6-month increase slightly higher than its pace over 12 months. The 3-month inflation rate traces out a strange path in which it seems to peak in early-2022 as it proceeds to soften its pace through the end of the year, before spiking to a sharply higher peak rate and then diving sharply and essentially returning the inflation rate for the core back to what had appeared to be the downtrend for the earlier pace of decline before the secondary spike arrived. All of this makes evaluating what's going on in the core much more difficult since the 3-month inflation rate is so different than either the 6-month pace or 12-month pace. Also, because the core has exhibited this extremely rogue behavior, imbuing it with the kind of volatility we normally expect to see in the headline rather than in the core, trusting it becomes more a matter of faith.

The Bank of England The Bank of England must be breathing a sigh of relief, in the wake of these developments. Not only has inflation turned lower but it's done it without having a substantial lift in the unemployment rate. The claimant rate of unemployment, that is more up-to-date, shows that unemployment has moved up to 4% in August from 3.9% in June, not much of an elevation particularly given the deceleration that has occurred in the inflation rate. The headline inflation rate has turned very sharply lower, and the core rate has turned low. The sequential rates of growth, however, are not the whole story. The core rate hasn't moved as much if we simply look at the performance of the year-over-year pace. But the performance in the core over 3 months and 6 months suggests that there's going to be more deceleration in the 12-month pace in the months ahead.

Inflation diffusion The diffusion data that look at the inflation acceleration in one period compared to the previous period show that a year ago the 12-month pace was accelerating in all categories compared to 12-months earlier. Currently the 12-month pace compared to a year ago is accelerating modestly with the diffusion calculation of 54.5; for diffusion the neutral reading is 50%. At that reading, the proportion of categories with inflation accelerating and decelerating is balanced. Over six months, diffusion declines to a 45.5% level; over 3 months, it falls extremely sharply to a 9.1% level. Over 3 months, inflation accelerates only in one category. And that's comparing the 3-month rate to the 6-month rate that already has declined; the acceleration for inflation over 3 months is only from the category ‘education’ where the annualized rate for inflation ‘picks up’ to 3.7% from 3.6%. These are quite impressive trends for the U.K. if the trends have staying power.

Inflation in the European monetary area continue to be strong with August rising by 0.6% month-to-month after rising 0.4% in July and 0.2% in June. The closely watched core measure turned weaker in August rising by 0.3% after a 0.5% gain in both June and July.

Monthly inflation basics Among the four largest euro area members, all but Spain showed inflation increases month-to-month. Posting a 1.4% increase in its July HICP, August brought a much lower 0.7% increase. And what was a significant month-to-month deceleration for Spain was also the second largest monthly headline gain among the Big Four economies. Core inflation for the four largest economies accelerated in only two of the four largest economies. Germany showed inflation excluding energy rising to 0.4% in August after a 0.2% gain in July; Italy's core crept up by 0.1% after being flat in July. The core inflation rate in France edged up 0.1% month-to-month after a 0.5% gain in July, while Spain’s core rose by 0.4% in August after rising a sharp 1.1% in July. Spain’s 0.4% core gain was a deceleration and also tied for the strongest month-to-month core gain across the Big Four economies in August. Comparisons always are complicated when you look for context.

Trends in general When cast in terms of annualized inflation trends – 12-months to 6-months to 3-months- the trends were substantially mixed with negative results over three months. Inflation decelerations were broadly posted over 6 months compared to 12-months and for 12-month inflation rates compared to their values of 12-months ago. Headline inflation over 12 months broadly decelerates compared to 12-months ago while core inflation broadly accelerates.

Headline vs. core trends-acceleration/deceleration Headline inflation in August rises 5.3% over 12 months. That decelerates to a 3.3% pace over six months then ramps up to a 5.2% pace over three months. The 3-month pace is sharply higher than the 6-month pace; and the 3-month pace is only a tick weaker than the year-over-year gain. Core inflation in the EMU is up by 5.4% over 12 months then decelerates to a 4.8% pace over 6 months. Over 3 month inflation comes back to life with the EMU core rising by 5% annualized, on balance a speed-up over 6 months and a moderate slowing by less than one-half of one percentage point comparing the 3-month pace to the 12-month pace.

Sequential trends Looking at these same trends for headline inflation sequentially, all headlines show slower gains over 12-months compared to 12-months ago and another slowdown follows over 6 months compared to 12-months. But over 3 months headline inflation accelerates in all Big Four economies with two of them showing faster inflation over 3 months than over 12 months annualized. Inflation over 3 months accelerates compared to 12-months in Germany and Spain while it decelerates in France (by one-half of one percentage point) and in Italy where the inflation rate is nearly halved over 3 months compared to 12-months.

Core inflation sequentially Core inflation is more interesting from a trend standpoint. It shows year-on-year accelerations in three of four of the largest EMU economies compared to its 12-month pace of 12-months ago. Only Spain shows less pressure over 12 months. Over six months core inflation pressures drop broadly across each of the Big Four economies and by significant amounts. But over 3 months inflation accelerates in two countries and decelerates in the other two. Inflation surges to a 7.9% annual rate in Spain over three months, topping both its 6-month and 12-month pace. In Germany, ex-energy inflation picks up from 3.6% over six months to 3.9% over three months and still shows a two-percentage point back down from its year-on-year pace.

Oil continues to be a disinflation factor The bottom of the table chronicles the performance of oil prices showing Brent is still favorable monthly falling in both July and August -as well as declining on balance over 12 months, 6 months and 3 months.

Inflation evaluation-strange brew The table shows still unacceptable inflation levels and less than reassuring trends across the largest EMU economies as well as for the weighted-average impact of all member countries on EMU itself. With an inflation objective of about 2%, the ECB finds the five-year headline gain (compounded pace) at 3.6% compared to 2.6% for the core rate. Headline inflation over five years for the Big Four range from a high of 4% in Germany to a low of 3.1% in Spain – had I tried to tell you ten-year years ago that would happen, you never would have believed me! And this is for inflation over five years – not a monthly quirk. Core inflation over five years averages the highest among the four largest EMU economies in Germany at 3.2% and the lowest in Italy at 2.3%.