Economy in Brief

Monthly German inflation has been volatile with the HICP headline logging -0.3% in March, surging by 0.8% in April, and gaining 0.2% in May. The HICP Core rose by 0.2% in March and by 0.3% in each month, April to May. The domestic CPI has been steadier monthly and better-behaved. Still, among the four measures, German inflation over three-months still runs too-hot at annual rates ranging from 2.8% to 3.6%.

Sequentially these four inflation paths for HICP Vs the CPI and for headlines Vs the cores show either inflation stuck at a pace too-high or at a pace too-high and still accelerating. The HICP headline rises by 2.8% over 12-months, steps up to 2.9% over 6-months, then steps back down to 2.8% over 3-months. This contrasts to the domestic CPI measure that runs cooler but shows acceleration gaining 2.4% over 12-month and six-months then steps up to 2.7% over three-months. Both core rates at least ‘tend-toward’ acceleration. The HICP core is at 3.3% over 12-month and rises to 3.8% over 6-months and 3-months. The Core domestic CPI gains 2.7% over 12-months steps down to 2.6% but then steps up to 2.8%, a three-month pace above the 12-month pace.

In addition to the sequential trends in the table described above, the chart shows a progression of year-over-year rates, 6-month rates and three-months rates. Viewed as time series all these profiles have stopped falling and each is up from its cycle low and at least ‘stuck’ if not accelerating.

The ECB, of course, targets EMU inflation not German inflation. But Germany is the largest EMU economy, and its results get the largest weight in the inflation index the ECB does target. Having German inflation this stuck, or accelerating is not good for EMU.

The details of German inflation data look better (these derive from the domestic CPI series). We see inflation is accelerating in fewer than 50% of the categories over each month February to March, March to April, and April to May. That is very good news. Over the broader sequential timeline, inflation accelerates compared to its year-ago pace in only 18% of the categories. Over six-months, however, a time horizon when the CPI did not accelerate compared to its 12-month pace, and the core actually weakened, the breadth of inflation rose sharply to 72.7%! It was accelerating in nearly three-quarters of the categories. But that broad acceleration did not impact the headline results much.

All that simply points out that inflation has many dimensions; its calculation will depend on the period one chooses to measure it, the index one uses to describe it, and that, in turn, will involve the application of a weighting scheme. When inflation is not broadly experienced across index components but is embedded in components with large weights it may hit the index harder than breadth would imply. For this reason, I like to look at inflation on several measures and across various horizons.

A perspective on German Inflation When we take this eclectic approach for German inflation we see some good news at the grass-roots level as accelerating inflation does not appear to be broadly experienced. However, it is intense enough in categories with large weights to keep the inflation metrics pressured. The good news is that the hint at inflation acceleration is weak. The diffusion data suggest underlying pressures may be more isolated rather than spreading and it may be that some of the lumpier categories shed trend tendencies more slowly. For the time being, the German inflation data are not good news and they do show inflation stuck too high.

A Global Phenomenon Not to be Dismissed Stuck inflation is also part of a global phenomenon, so I would be reluctant to dismiss ‘sticky inflation’ and to treat it as transitory phenomenon that will eventually behave itself. We have already seen that mistake made once. There seems to be a lot of wishful thinking by central bankers these days. A nice long period of inflation containment and success has immediately brought people to the conclusion that all the sweat, toil, and sacrifice taken to get inflation low in past years was perhaps, unnecessary. Many now seem to believe that inflation will behave all on its own. But there is little evidence of that. And with global conditions shifting and China no longer competing to export goods as aggressively (or being allowed to) and with the geopolitical shift going to the display and acquisition of global power, influence, and territory, the peace dividend is certainly spent. Government budgets are more likely to be too-fat than too-thin. This means monetary policy is going to have to go ‘back to work’ to provide a counter-weight instead of resting on its past laurels. And few seem to appreciate that.

Manufacturing in the European Monetary Union advanced by 0.4% in April based on the performance of the median performer among the eleven countries listed in the table. That was a step up from a 0.2% decline in March and compares to a 0.6% gain in February. We have in hand S&P PMI data for the European Monetary Union in April for comparison. Month-to-month, that PMI reading was lower, as March was lower than February, although February had seen a month-to-month gain. In February, March and April, the manufacturing PMIs for the euro area continued to be below 50, that indicates output is contracting in the lexicon of PMIs.

However, the industrial production index for manufacturing is a different kind of accounting for industrial performance. It doesn't have all the elements that a PMI report, which has production, balanced with prices, supplier delivery lags, employment, and more. The overall PMI is a blend of all those things. Industrial production is simply about output and unlike the PMI gauge which looks at the breadth of change across categories among a group of individual reporting companies, the industrial production figures tote up actual output and present the result as a magnitude of change. The PMI process and the industrial production process generally produce similar signals. The PMI approach has the advantage that it can bring us data that are more up to date since diffusion data are easy to report. The industrial production approach gives us a more precise idea of what's going on in terms of the magnitude of change in the sector. Formally the PMI gauge looks at the breadth of output increasing or declining; industrial production looks at the magnitude of the change in output.

Typically, we compare the PMI gauge to the year-over-year growth rate in IP; on that basis, there is a ‘disconnect’ this month since IP falls over 12 months and manufacturing PMI is below 50 in April.

However, it's also clear that there is some progress going on in manufacturing. The month-to-month changes in growth and acceleration show improvement. Growth acceleration occurs in 63% of the categories in April using industrial production; acceleration is 46% in March and occurs across 61.5% of EMU members in February. Over the last three months, output has tended to accelerate more than to decelerate. Sequential data show output falling over 12 months, rising at a 0.8% annual rate over six months – again, based on the median- and rising at a 4.9% annual rate over three months. That's an accelerating trend. Engaging acceleration by calculating the breadth of acceleration across members reported in the table, we have 70% accelerating over three months, 38.5% accelerating over six months, and 50% accelerating over 12 months. That's not a crystal-clear trend, but it's suggestive of a manufacturing sector that is regaining its footing.

Quarter-to-date data output looks at the growth across European Monetary Union members in April compared to their first quarter average. On that basis, there is a median increase of 3.6% at an annual rate in the works. Only four of the reporters in the table show quarter-to-date declines in progress among monetary union members.

Assessing the ratio of current industrial production to January 2020 before COVID struck, there are five of eleven members that are still below that pre COVID level, underscoring the sense in which this period of growth dating back to pre-COVID has been disappointing. We're looking at a four-year period. And we're comparing the level of industrial output over that span and finding that nearly half of the members have output that's lower than it was over four years ago; that's not reassuring. However, if we look at the shorter-term growth, the growth rank of year-over-year IP growth compared to what it's been on data back to 2007, the results show more promise. Portugal, Greece, and Spain each show growth rates that rank in the top ten-percent of what they posted over that period. France and Belgium show growth rates that rank above their respective, 50th percentiles in the 60th percentile range. This indicates that their growth rates are above their medians. However, for most of the monetary union members Austria, Germany, Finland, the Netherlands, Luxembourg, and Ireland, growth rankings are below the 50th percentile indicating growth below their medians during this span. And for most of these countries growth rate rankings are below their 25th percentile - that is, they lie in the lower quarter of all growth rates reported. This further emphasizes the weakness in growth. Although the union does show some pockets of strength and there seems to be some rebound in progress.