Economy in Brief

Inflation in the United Kingdom, as measured by the CPIH, rose by 0.4% in August as well as for the measure excluding energy, food, alcohol, and tobacco that rose by 0.5%. The recent sequence of monthly inflation rates is not hospitable or kind to the notion of the Bank of England doing any further rate cuts anytime soon.

Sequential inflation readings show the headline CPI measure up 3.1% over 12 months and at a 2.9% annual rate over six months. It further accelerates to a 4% pace over three months. The expanded core excluding energy, food, alcohol, and tobacco is up by 4.4% over 12 months, up at a 5.1% annual rate over six months and continues to rise at a 5% annual rate over three months. Both series are at some point about a tick or so short of being persistently accelerating measures. However, putting technicalities aside, inflation clearly is accelerating in the U.K. and both measures embrace generally accelerating trends. The year-over-year headline pace of 3.1% is too fast; the core rate of 4.4% is way too fast. The three-month growth rates that have the headline at 4% and the expanded core 5% are far too fast.

Applying the diffusion concept to 12-month inflation compared to a year ago, inflation does decelerate on that time horizon with a diffusion value only at 18%. Diffusion above 50% means inflation is accelerating in more places than it is decelerating. Below 50% diffusion flags inflation that is more broadly decelerating. The 12-month reading flags a sharp broad slowing for inflation. Of course, the 12-month headline inflation rate is 3.1% and a year ago it was running at twice that pace of 6.3% so finding general broad deceleration is not too surprising. The next step is a comparison of six-month inflation to 12-month inflation. Here we see diffusion up to 63.6%. So, inflation is accelerating in more categories than it's decelerating over six months compared to 12 months, not a good development. Over three months, however, headline inflation accelerates to 4% while the core is more or less unchanged at around the 5% mark, but diffusion falls back to 36.4% indicating that inflation is only accelerating at about one-third of the categories over three months. So that's a better development.

On a month-to-month basis, diffusions in August and July are both above 50%; but diffusion in June fell a little short of that with a diffusion gauge at 45.5%. Recent months seem to show some inflation pressures on balance.

Germany’s ZEW survey has deteriorated sharply in September. The current index has fallen to -84.5 in September from -77.3 in August. The expectations index fell back to 3.6 from 19.2 in August. It had been as high as 41.8 as recently as July 2024. Conditions and expectations for Germany have taken a sharp turn for the worse over the last few months. The chart shows that expectations are much better than their depths of 2022. Their evolution from there has been erratic, but there has been a clear and strong rebound in expectations from those lows of 2022. However, there's also been significant vacillation and we're currently in a period in which the downdraft in expectations is relatively severe. Current conditions are amid quite different circumstance; they had some rebound from their 2022 lows which were still slightly higher than the 2020 lows that occurred during COVID. However, that rebound was not long lasting; in 2023 the current index had sunk substantially and although there was some minor rebound, we are now seeing current conditions making new lows and some of the lowest readings that we've seen since the brief COVID-caused recession.

The current index has been stronger than its current value 94% of the time, underscoring how extremely weak the current observation is. Expectations have been stronger about two-thirds of the time, a significant metric, but not as draconian as the reading for current conditions. However, in July expectations were strong enough that they had been weaker only about one quarter of the time. Both expectations and current conditions have taken a severe turn for the worse.