Economy in Brief

PPI inflation was up by a strong 1.2% in January after rising by 0.4% in December. Headline inflation is accelerating sharply from 1.9% over 12 months to a 4.1% pace over six months to a 12.9% pace over three months. However, core inflation in the EMU has been much more tempered and steadier. Core PPI inflation in the European Monetary Union (EMU) is up by 0.2% in January, the same as in December. Core inflation has been relatively steady at 2.7% over 12 months and a bit weaker at 2.4% over six months and at 2.6% over three months. It’s above the ECB targeted pace, mildly above the pace that the ECB sets for the HICP, but still only a moderate overshoot.

The table on PPI inflation rates sequentially shows that inflation on the PPI gauge has been flaring sharply across members of the EMU and in other non-EMU countries. Annualized inflation ranges from a low of 0.9% over three months in Austria to 67.6% in Ireland. 84.6 percent of the reporting countries in the table show accelerating inflation from 6-months to 3-months; in fact, inflation has been accelerating from 12-months to 12-months ago and over 6-months vs. the 12-month pace.

The average annualized inflation rate rises from 3.6% across countries (unweighted) over 12 months to 7.4% over six months to 18.3% over three months. The price action for the EMU (top of the table) is a bit softer because that process uses a GDP weighting scheme. But the signals are much the same.

In context, we see a much more stable core environment also reported near the top of this table. I use Germany as an individual example. Its gauge for the PPI excluding energy rises by 1.3% over 12 months, then at only a 0.5% pace over six months. Over three months, German ex-energy inflation is at a 1% pace. The moderation in core inflation stands in marked contrast to headline inflation.

Oil prices show recent pressure from Brent in the table over three months. However, Brent is still lower on balance over 12 months and six months.

EMU PPI inflation is not a reassuring report. Inflation is flaring sharply across the community for the PPI. However, this is mostly headline inflation, energy and commodities are driving this performance. Core inflation or ex energy inflation metrics show much more tempered and stable inflation. There is a good chance that this current spike will simply pass. Oil prices in markets today – live market prices- are actually weakening suggesting that the bubble in oil prices will not have lasting impact on the PPI. Short-term inflation trends are volatile and are not to be trusted. And the PPI is as guilty on this score as any price index.

Unemployment in the European Monetary Union (EMU) continues to hug all-time lows at 6.2%. In the EU, the unemployment rate is at 5.8% in January, also an all-time low for that reading.

On a year-over-year basis, trends for unemployment are mixed, falling in six of the 12 monetary union countries in the table and rising for six others. However, because of country size differences, the EMU shows that the unemployment rate falls by three-tenths of a percentage point over 12 months as does the rate for the EU.

What is remarkable about these statistics is that we are looking at very tight and well performing labor markets, even though the European economy has not been doing particularly well- even with war on its doorstep and with the manufacturing sector performing particularly poorly for a long stretch of time. The local service sectors have carried the monetary union and for the most part its member countries to sustained strong economic conditions as far as the labor market is concerned.

However, as we can tell from recent elections in Europe and in the United States, there's been a great deal of disappointment and disillusionment about economic performance. Unemployment rates may be low, and may have remained low; however, economic conditions generally are not that favorable. People are not that happy and, despite the low rates of unemployment, both Europe and the United States have been battling sustained above-target rates of inflation.

Are we learning that consumers hate inflation more than we thought? The other thing that is strange about this period is that inflation has been overshooting for a long time. It's closer to being in its range in Europe than it is in the U.S. (45-continuous months of missing its target). However, both the U.S. and Europe have had a very long period of time when their target either has not been met (as in the U.S.) or has been only sporadically met (EMU) and still has inflation regarded as being excessive. Central banks have not taken the steps to control inflation even though labor market performance is excellent by historic standards. And while central banks have bent over backwards in this respect, generally consumers are not particularly swayed by the excellence of the conditions created by these policies.

Central banks chose to let inflation run hot Central banks’ choice to pursue some sort of soft-landing and avoid recession has not been particularly popular with people although they have remained for the most part fully employed. In fact, the overshooting of inflation seems to have created a great deal of unrest despite conditions of ongoing full employment both in the United States and across Europe. This will be something that economists are going to have to look at because there's nothing about this reaction that is obvious that people should naturally react this way to this kind of economic performance. One might expect that people would be happy to have full employment and although the inflation overshoot was horrific for a period of time it has since come under ‘better’ control and isn't as particularly as high as it once was; although it's also true that because of inflation being what it was, we have a situation in which prices are still quite high. High inflation can be cooled but it generally leaves higher prices in its wake, even once it is stamped out for good. And inflation is not yet stamped out for good. Economist stress that inflation has been largely tamed but… are they forgetting that consumers pay those still high prices, not just the inflation rate?

Sequential and monthly inflation changes point lower Sequentially among the 12 EMU countries in the table, six of them show unemployment declines over 12 months and six others show increases. Six of them show unemployment declines over six months while five show increases. Over three months, five of them show unemployment declines while three of them show increases. In terms of the monthly data, in November there are four countries reporting month-to-month declines compared to two reporting increases; in December five countries report month-to-month declines with five others reporting month-to-month increases. In January, the split is six reported inflation declines to four reported month-to-month increases.

Trend to lower unemployment rates cut across country size Generally, there are more unemployment rate declines being reported than increases being reported across countries; that is supported by and consistent with the aggregate data for the monetary union that shows the unemployment rate has fallen over the last year. However, the further meaning of the country level data is that the trend for the monetary union is broad, and it's not being dominated by the large countries; the small countries are not being left out of the improving process. Over the last three months, Greece and Spain are the only countries showing declines in the unemployment rate in each month. Over the broader period, looking at changes over 12 months, six months and three months, there are consistent declines in unemployment being reported in Portugal, Greece, Ireland, and Spain. There are consistent increases the unemployment rate being reported in the Netherlands. However, there also are countries with strings of increases mixed with unchanged unemployment rates reported over these three periods: Belgium, Germany, Finland, and Luxembourg.

Very little evidence of unemployment stress Among monetary union members, only three countries Luxembourg, Finland, and Austria have unemployment rates above their respective median rates that they have recorded on data since 1994. For those three countries Finland and Austria report unemployment rates above their median by a small amount by 0.4 percentage points for Austria and 0.4 percentage points for Finland. Only Luxembourg has a ‘substantial’ unemployment rate overshoot with the current unemployment rate at 6.4% compared to a median of 4.8%.

Among these 18 countries and regions reporting manufacturing information in February, 12 of them show month-to-month improvement. Ten showed improvement over three months compared to six months while only three have improved over six months compared to 12 months. Eight of eighteen showed improvement over 12 months compared to 12-months ago.

The median manufacturing PMI reading for February is 49.5, just below the level of 50 that marks the level where manufacturing is considered unchanged. The average over 3 months, 6 months, and 12 months all are below the 50-mark. However, the median reading in the table marked with percent sign (%) measures the percentage of the raw PMI diffusion readings that are improving period-to-period. All are above the 50% mark, showing that there are more reporters showing improvement period-to-period than showing weakness. However, the percentage improvement does not reflect the value of the underlaying PMI index or if it is above or below its break-even value; it only shows relative improvement.

In that sense, there are some mixed signals in this report. Conditions are slowly improving, but they still show a tendency for output to fall.

The table also looks at a broad assessment by ranking the level of the diffusion reading this month across all countries on a timeline back to January 2021. On this basis, 9 of 18 are below the 50% mark. This metric identifies the median of the series since January 2021. The median of the rank standing is at the 49-percentile mark, just below 50%, which marks the median of group for the entire period.

None of this is really good news for manufacturing globally. But it is an absence of really bad news and contains news that conditions are worsening. Improvement is more common than worsening. So that is something. It is a back door to better times ahead but again it is true that manufacturing has been weak for quite a long time. In the last 31 months, the median for the group has been above the ‘50’ mark only twice in June and July of 2024. However, over the last eight months the diffusion median has been at a reading of 49-point ‘something.’ The manufacturing median has been on cusp of moving to signal expansion. But manufacturing in the global economy has not been able to go over the hurdle despite as close as it has come. We remain dwellers on the threshold…of expansion. Still not quite there yet.