Economy in Brief

The chart of new passenger car registrations provides the best overview of the performance auto registrations and registrations in Europe through June of this year. Based on the numbers, there is a gain of 7.1% month-to-month in June, but there is also a decline of 10.8% in May and that follows an increase of 11.8% in April. The path of passenger car registrations is basically well sketched out by the head movement of a bobble-head doll attached to the dashboard of a ‘57 Chevy driving over a cobblestone street. And the chart is clear that there has been a lot of up and down in registrations, but the trend has been still very flat amid all the choppiness.

Cyclical behavior Vehicle registrations had begun a peaking action before COVID struck, but then the COVID episode took registrations down very sharply. They rebounded quickly and sharply post-COVID, but that didn't last very long. Russia's invasion of Ukraine took its toll on the outlook and on sentiment. As a result, another downtrend took place. That bottomed early in 2022 and there was a rebound; that rebound had pretty much run its course by mid-2023; from that point forward, we have simply been looking at this very volatile sideways performance with monthly registrations going back and forth, up and down but creating no trend.

Year-on-year growth clashes with volatility Still, over 12 months total European registrations were up by 3.1%. If we calculate that from a three-month moving average just to try to stabilize the calculation, it moves up slightly to 4.2%. The year-over-year comparison shows increases in registrations in each of the five countries detailed on the table. Registrations are strongest year-over-year in Italy where they rise 15.2%; they rise by 5.7% in Germany and by 5.1% in France. Registrations rise by a lesser amount in Spain and the U.K. as Spanish registrations are up by 2% over 12 months and U.K. registrations are up by 2.4%. Here note that the three strongest year-on-year gains are France, Italy, and Germany that had year-ago results that fell month-to-month or were only a tick higher by 0.1%. Spain and Italy, in contrast log month-on-month changes a year ago that rose 3% to 4%. So volatility haunts even the year-over-year calculations.

Even Broader calculations The big broad calculation that looks at the percent change of the most recent 12-month average against the previous nonoverlapping 12-month average shows European registrations up by 7.4% while registrations among the five countries detailed on the table show an 11.2% gain in the U.K., a 9.7% gain in Italy, a 10.7% gain in France, and a 7.7% gain in Spain; Germany puts in the weakest performance having registrations up by just 4.7%.

Performance since COVID For the sake of perspective, I also calculate the percent change in registrations compared to January 2020 before COVID struck. On that basis, European total registrations are lower by 12.7%. U.K. registrations are lower by 18%, Spanish registrations are lower by 10.7%, Italian registrations are lower by 5%, and French registrations are lower by 4.4%. Registrations in Germany are lowered by just 1.8%. Registrations in Germany have retained their level better than any other countries in the group.

Headline inflation in the euro area appears to be disciplined as it rose by 0.1% in June after rising 0.2% in May. Headline inflation is up 2.5% over 12 months, up to a 2.9% annual rate over six months but then simmers back down to a 1.8% annual rate over three months. There's some volatility there, but the three-month inflation rate is reassuring. However, is that what the ECB is really looking at?

Rotten in the core? The core inflation rate is an entirely different animal in June. It rose by 0.4% in June, it rose by 0.3% in May, and it rose by 0.4% in April. None of these month-to-month increases is acceptable. Looking at the performance of the core rate sequentially, the core is up by 2.9% over 12 months, it's up at a 3.2% annual rate over six months, and then it accelerates further to a 4.1% pace over three months. Each of these profile rates, taken on its own, is too-high; but the sequence taken together is even more disturbing because it shows that core inflation is too high and accelerating, from just short of 3% to just over 4% as the venue shifts from a 12-month calculation to a three-month calculation.

Inflation in the large economies of the EMU and in the U.K. The four largest economies in the monetary union show headline inflation is generally not behaving. Germany, France, and Italy each show that inflation is increasing over three months compared to six months; while in two of those cases the six-month inflation rate fell compared to the 12-month inflation rate, the three-month inflation rate in each of these countries is higher than its 12-month counterpart. The three-month inflation rate in Germany runs at 5.4% compounded, in France at 3.5%, and an Italy at 3%. Among the largest four economies, the only one with inflation behaving is Spain where the 12-month inflation rate is 3.6%; then it drops to 2.9% over six months and logs a three-month pace of inflation at 1.7%. This is another disturbing sequence of numbers for the ECB. By comparison, nonmember U.K. shows headline inflation low and decelerating.

Core inflation is slightly excessive Core inflation shows inflation has accelerated in France and Italy relative to its 12-month pace. For France, the three-month core inflation rate is at 2.6%, up from 1.9% over 12 months; in Italy, the core is at a 2.8% pace over three months, up from 2.1% over 12 months. Spain shows inflation behaving at 2.1% over three months compared to 3% over 12 months. Germany shows ex-energy inflation behaving at 2.1% over three months, compared to 2.6% over 12 months. Nonmember U.K. shows a core inflation pace up to 3.6% over three months after a six-month lull and a 3.5% pace over 12 months.

Role and goal of the ECB Of course, the ECB targets inflation for the entire European Monetary Union (EMU) and is not particularly interested in the inflation performance in any specific country compared to the performance of the union. However, since we have country specific information, just as it's interesting to look at that inflation as at inflation across commodity categories. When we do this, we find that inflation is either not well behaved in its headline or not behaved in its core form. So the details are not confirming that overall inflation is behaving the way it ought to. And, as noted above, when we look at the headline, inflation appears to be behaving, but when we look at the EMU-wide core rate, which excludes the volatile food and energy components, we see a very different picture. The core is accelerating and running at a 4.1% annual rate over three months, approximately twice the target that the ECB has for inflation.

So where do the ECB policy trade-offs stand? These calculations raise question marks about whether the ECB is really close to cutting interest rates in this cycle or not. There's been a lot of talk about cutting interest rates; there's a lot of talk from the U.S. about cutting interest rates as well. We include the U.K. inflation rates in this table and U.K. core inflation appears to be stuck, stubborn, and possibly even accelerating. Having central banks that want to engage in a policy in which they cut interest rates, puts policy in a dangerous spot. They need to know cuts are fully supported by the underlying inflation dynamics. Neither the U.K. nor the ECB seem to be on very solid footing on that score. In the case of the U.S., inflation is beginning to trend in that direction but it hasn't firmly established the trend for the headline and core especially not for CPI as well as PCE rates. Of course, when we switch our gears to talk about the Federal Reserve, the targeted inflation rate is the PCE and not the CPI. Fed Chair Powell in the U.S. has recently referred to this and confirmed that the Fed's target is the PCE; however, he has also noted the unusual decoupling of the PCE rate from the CPI rate. Were the Fed to cut interest rates at a time that the PCE is behaving and the CPI is not, there's a good chance that could create some blowback in the markets. Whether we look at the U.S. or Europe, we see a good deal of policy dissonance.