Economy in Brief

Inflation in August was well behaved; the headline series with the monetary union posted a gain of 0.2% after 0.3% gains in each of the previous months. Still those increases mean that the three-month inflation rate is at 3% compared to 2.1% over 12 months. Stop headline inflation has grown moderately hot in the monetary union.

Across countries the largest EMU members has so well-behaved inflation in August, with Germany up 0.2%, France up 0.1%, and Italy and Spain both unchanged. However, inflation in the previous two months was a bit stronger leaving three-month inflation rates for France, Italy, and Spain over 2%. Over six months only Italy is over 2% and that's barely, and over 12 months only Spain is substantially above the 2% mark.

Core inflation in the monetary union is where the elusiveness and stubbornness is for the three large economies that report core inflation. Germany actually reports ex-energy inflation. Italy and Spain report core inflation. They're all showing increases of 0.3 and 0.2 over the last two months. Over three months German ex-energy inflation is running at a 2.4% annual rate with Italy's core at 2.7% and Spain's core at 3.8%. Over 12 months German ex-energy inflation is up at a 2.6% annual rate, compared to a 2.4% annual rate for Spain’s core and Italy’s core that that is nearly on the money at a 2.1% annual rate.

The 12-monht inflation rate is marginally worse for headline and core rates across this group of countries in August compared to July. For the EMU, the headline is the same at 2.1%. Even though shorter measures show some pressure building, 12-month inflation is marginally lower in August 2025 than in August 2024 for headline and core measures in the large countries.

However, there has been no sense of controlled inflation recently as all averages are clearly excessive with the average five-year reading at a low of 3% for core inflation in Italy to a five-year average high of 4.5% in Germany. This legacy for inflation is still a problem for some although central bankers around the world are trying to dismiss it as a past event; however, no one's quite sure whether inflation is really over the hump and going back to normal for good.

This week, we dive deeper into developments concerning India and China, while noting the recently improving relationship between the world’s two most populous countries. In India, market sentiment understandably soured (chart 1) after US President Trump followed through on earlier threats to raise additional tariffs to 50%, in response to its purchases of Russian oil. While these tariffs would render much of its exports to the US uncompetitive, a small source of interim relief comes from current exemptions, such as for pharmaceuticals and electronics, India’s major export categories to the US (chart 2).

Turning to China, overcapacity remains a concern for many of its major Western trading partners. Persistently rising export volumes amid falling export prices can signal overcapacity, though they are not definitive evidence. Nonetheless, indications of overcapacity — for example, in China’s transportation exports (chart 3) — continue to raise concerns. Europe has responded with significant tariffs on Chinese EVs, but Chinese producers have offset these by onshoring production in Europe or switching to hybrid vehicles, while continuing to expand export volumes despite declining prices (chart 4).

Amid rising US trade pressure, China and India have drawn closer as partners of circumstance despite their often-thorny history. Prime Minister Modi’s attendance at China’s Shanghai Cooperation Organization (SCO) summit, starting Sunday — his first visit to China in seven years — is a strong signal of improving ties. While this engagement may help foster trade and investment between the two countries, underlying challenges remain. India’s substantial trade deficit with China (chart 5) could worsen if imports increase, and mutual direct investment — which has been subdued in recent years, perhaps due to previously frosty relations — may require further policy support to rebound (chart 6).

India President Trump followed through on his earlier threats by imposing an additional 25% tariff on India, raising the total additional tariff rate to 50% as of last week and in response to India’s purchases of Russian oil. Indian markets reacted sharply, with equities falling and the rupee weakening, as shown in chart 1. Given the scale of the new tariffs — which render much of India’s exports to the US uncompetitive — calls for government and monetary policy support have intensified. Authorities are already bracing for the immediate impact, including first-round effects such as rushed efforts to re-route trade, seek alternative markets, and limit losses through layoffs. On the fiscal side, Prime Minister Modi announced consumption tax cuts last week to cushion the blow, and the crisis may also present an opportunity to finally reform India’s notoriously complex tax system.

Inflation in the monetary union was tepid across the large, early-reporting, economies in August. The HICP rose by 0.2% on the month in Germany, rose by 0.1% in France, while it was flat in both Italy and Spain. However, these outstanding readings followed several months of stronger inflation; in particular in July German prices rose by 0.2%, in Italy the gauge rose by 0.3%, in France by 0.4%, and in Spain by 0.5%.

As a result, over three months, inflation is running hot on the headline gauge, over 2% in France, Italy, and Spain, and just below it, at a 1.8% annual rate in Germany. Over 12 months, inflation is well behaved, but that headline is up 0.8% in France, rises by 1.7% over 12 months in Italy, by 2.1% in Germany, and at a 2.6% pace in Spain. That is a bit more mixed but still quite solid set of results. The EMU-wide HICP for July – on a one-month lag- rises by 2.1% over 12 months with a core at 2.3%.

Core inflation is not well reported on an early basis. The Italian core rate rose 0.2% in August with Spain at 0.3%; both Italy and Spain logged increases of 0.3% in July and in June and as a result the 3-month inflation rate on the core for Italy and Spain runs at 2.7% in Italy and at 3.8% for Spain. These, of course, are much higher and more disturbing numbers for inflation. The 6-month inflation rate for core Italy and Spain runs at 2.9% and 3.1%, respectively, while over 12 months the Italian core is up by only 2.1% and the Spanish core is up by only 2.4%. The kick up and inflation for the core is a relatively recent phenomenon.