Economy in Brief

S&P flash PMI readings for this selected group of early reporting eight countries continues to show relatively mixed performance across the eight countries in the table. Trends, however, suggest a phenomenon that is largely unexpected because it shows some strengthening in manufacturing against weakening in services. During this period, when US tariffs have been threatened (and counter tariffs mooted as well) - and only recently imposed. We might have expected manufacturing to be doing worse and for the services sector to be relatively steadier. It may simply be too soon for this trend to play out, or, it may be that manufacturing, in fact, has ramped up slightly in the months just before tariffs took effect as manufacturers tried to slip goods across customs portals before the tariff walls went up. In any event, the tariff walls that were threatened were not the ones that went up, and the more modest tariffs were put up in the United States except those imposed against China but even there the tariffs that eventually were set in place for the interim, we're lower than the ones that had initially been threatened.

Data show that on year to year changes, there's been a broad strengthening that has occurred across this 8 country area with 24 sector observations recorded- that is 3 sectors (manufacturing services and a composite) for each country across eight countries. In this mix, there are only 5 sector readings that are weaker on a year over year comparison. However, over six-months compared to 12-months and over three-months compared to six-months the weakening dominates with 13 of 24 sectors showing weakening over six-months, and with 14 of 24 weakening over three-months.

The monthly data that are more volatile showed that there is more weakening in March than there was in February by a large factor, as 18 sectors weakened compared to six improving. But, after March, both April and May showed only 11 sectors weakening month-to-month with 13 improving. The monthly data, however, tend to hop around and the current monthly data are still available on only a flash basis and are subject to change.

More fundamentally we can evaluate these sectors by the queue standings of their flash readings. In May this entails ranking the sectors back to January of 2021. On this basis eight of the 24 sectors show standings above their 50th percentile, putting them above their medians for the period. Only 1/3 of the sectors are performing at a better than median level on comparison with data back to 2021, a period that has not been a period of any particular strength. The current median value for the queue standings for the overall (or the comprehensive) index is in and its 40th percentile. That compares to a 52-percentile standing for the manufacturing median and a 35-percentile standing for the services median. So, manufacturing is doing relatively better (relative to its median) and services are doing relatively worse they may have generally since 2021. On this group of countries, the manufacturing PMI has averaged 51.7 on the period compared to services averaging a slightly stronger 52.7. The comprehensive average has been 52.4. These are relatively low performance results for the full period.

This period of course includes the tail end of the COVID period, plus the recovery from COVID and then it includes the period when the Ukraine invasion by Russia began and its ongoing aftermath. And now, in early 2025, it's going to start including the period where the flirtation with tariffs began. We will be on the outlook to see how the tariff negotiations progress and how the imposition of whatever tariffs arise out of this works out. For now, the concerns are that the uncertainty over what will happen with tariffs is going to be adversely affecting activity, and, of course, there are geopolitical shifts, among them Europe becoming more responsible for its own defense which should push more economic activity generally into the European theater.

UK inflation is rising. Whereas weakening oil prices seem to be containing inflation everywhere else, particularly in the European Monetary Union, but also to some extent in the United States, we see in the United Kingdom that headline inflation is on an uptrend, core inflation is on an uptrend, too, not quite as discernible as this, but it's nonetheless on its own uptrend.

Headline inflation for the UK CPI-H measure rose by 0.6% in April after 0.2% in March and in February. The CPI-H version of core excluding food, energy, alcohol, and tobacco rose by 0.4% in April after rising 0.3% in March and 0.2% in February.

Sequential inflation rates show the CPI-H up 4% over 12 months, up at 4.7% pace over 6-months and up 3.9% at an annual rate over 3-months. All of these rates are excessive compared to the Bank of England's 2% target. A year ago, the headline was running at 3.1% year-over-year; conditions have worsened since then even in the face of what have been lower and falling global energy prices.

The sequential trend for the CPI-H core measure shows a gain of 4.3% over 12-months, a 4.6% annual rate rise over 6-months and a 4% annual rate gain over 3-months. The only clear pattern we have from these various periods is that in all of them the inflation rate is excessive; and one year-ago the core year-over-year pace was 4.4%. So, conditions appear as though they may have improved marginally since then, but again I would emphasize that I'm only saying that it appears so, and that the improvement is marginal.

Diffusion calculations show the breadth of acceleration period to period and demonstrate that inflation acceleration has become less common than it was a year ago when headline inflation was up 3.1%. The diffusion of inflation was only 9.1% then, that tells us that the overall inflation rate was 3.1% and that prices were not generally accelerating across most categories only in 9% of them. However, this year the diffusion gauge for the headline that has inflation up to 4% is at 54.5% and then the gauge over 6-months with the inflation rate is 4.7% has diffusion also at 54.5%. And both of those horizons’ inflation is accelerating slightly more than it's decelerating since the diffusion measures are above the neutral value of 50. However, over 3-months when the inflation rate settles down a bit to 3.9% the diffusion measure is only 36.4%, indicating that the breadth of inflation has narrowed and that there is now more deflation than there is inflation over 3-months. That comes from comparing the inflation rates when 3-month inflation was 3.9% to 6-months when it was 4.7%. The slightly improved diffusion gauge is therefore not surprising; however, it's also encouraging that it suggests that the slower inflation rate has more breadth to it and isn't just the result of one or two rogue categories that may have tipped the balance.

At the bottom of the table as a reference we have the unemployment rate as well as the UK claimant rate of unemployment and on these measures we you can see that the economy has been weakening slightly The year ago unemployment rate was 4%, the claimant rate was 4.1% over the last 12-months it moved up to 4.3% with the claimant rate still at 4.1% over 3-months. The unemployment rate is up to 4.4% compared to 4.5%; the claimant rate shows the unemployment rate has been creeping up although there's nothing draconian in train. This is not a happy report for the Bank of England. Inflation is still not under control and while the breadth of inflation may have been cut over three months all of the inflation data suggest that inflation is stubborn and that it has been stubborn and that there's a slightly accelerating trend that is still underway. This is an unfriendly report.

Headline German inflation has logged another stellar number showing prices down 0.7% in April after falling 0.7% in March and dropping by 0.2% in February. German inflation over three-months is falling at a 6.4% annual rate, over six-months it is falling at a 2.6% annual rate, and year-over-year it is falling by 0.9%. That progression shows clear discipline for German headline inflation and, in fact, raises the specter that inflation might be too weak with year-over-year inflation falling -1% at an annual rate, however, that's only part of the story

Polar opposite trends for the headline vs ex-energy In April the PPI excluding energy rose by 0.3%, it rose by 0.2% in March, and by 0.2% in February. The same progression for the PPI X-energy shows inflation running at 2.7% annual rate over three-months at a 1.9% annual rate over six-months now to a 1.7% annual rate year-over-year. This means, of course, instead of decelerating with prices receding, inflation is accelerating and rising. These are not just slightly different takes on inflation, these are polar opposite events, calling for polar opposite concerns, and polar opposite policies.

The role of oil When we wrote about CPI results earlier, we pointed out the same phenomenon was in place with headline CPI inflation very well behaved and core inflation not doing quite as well (see the CPI data in the table above). However, with the PPI this dichotomy is even clearer and it comes with the same source of divergence, the fact that Brent oil prices have been falling sharply the table shows Brent oil prices (adjusted into Euro terms) falling in April and March and in February and further shows the euro cost of Brent oil prices prices falling at a 60% annual rate over three months, following the 25% annualized drop over six-months, and the the 28% annual rate over 12-months. Oil prices are the engine that is making the inflation performance look good. However, beyond energy, the forces of inflation are still firm, still percolating, and in PPI terms, while they are at an acceptable year-over-year pace, they are beginning to accelerate as the three-month pace for inflation at 2.7% is too high.

Inflation by sector Inflation statistics by category shows consumer goods (NSA) inflation at 3% over 12 months, 4.5% over 6-months and at a 4.8% annual rate over three-months - excessive and accelerating. For investment goods inflation runs at 2% year-over-year up at a 2.8% pace over 6-months and then at a 2.4% pace over 3-months not exactly accelerating but both three- and six-month inflation rates rise above the preferred 2% year-over-year pace. Intermediate goods show inflation at 0.3% over 12-months, rising to 1% at an annual rate over 6-months and at a 3.5% annual rate over three-months.

The table includes the CPI as a reference point and there we see that the CPI sequentially is running at a fairly steady 2.1% to 2.3% annual rate. The ex-energy inflation rate is higher although still relatively flat in the 2.6 to 2.8% range- roughly one-half of one percentage point hotter than the headline.

Q2 Inflation Starts the quarter mixed Inflation in the second quarter, a quarter that data-wise is just beginning, shows the headline PPI falling 6.1% at an annual rate with the PPI ex-energy rising 3.1% at an annual rate sector readings show consumer goods, investment goods, and intermediate goods inflation runs between slightly- to substantially-excessive early in the second quarter. The German CPI and CPI ex-energy readings are running slightly hot even though on this time horizon Brent-euro-based oil prices are falling at nearly 50% annual rate.

Wrap on inflation: a dichotomy, but not a real problem A German PPI is not disturbingly strong but once again it's slightly strong and only the headline is really behaving and that's under the influence of some extraordinarily supportive news from oil prices. The headline, in fact, looks worrisome in the other direction because of the ongoing oil price collapse. On balance inflation in Germany appears to be still somewhat stubborn. Germany continues to be buffeted by the forces of war and the uncertainty over US tariff policy as well as the prospect of its own recently inherited burden to take care of its own defense expenditures, something that is likely to underpin growth in Germany and possibly to stoke more inflation pressures. These factors continue to be the main forces to keep an eye on in Germany. For its part, the ECB has warned that the future may be shaping up with different risks.