· Germany’s
manufacturing PPI surged by 0.5% in March elevating the 12-month
inflation rate to 4.2% and keeping inflation accelerating from 12 months
to three months, as the three-month rate climbed to 6.4% (saar).
Ex-energy the inflation acceleration is even clearer: from 2.8% over
twelve months, to 3.1% over six months, to 4.7% over three months. In Q1
2008 the PPI is also too high for comfort. The manufacturing PPI is up
at a 6.2% annual rate compared to a 3.5% annual rate for manufacturing
excluding energy.
· This result is, of course, for one of the low-inflation EMU nations. The non-energy PPI has risen by 0.4% in each of the past three months in Germany. We know that the ECB has just reset forecasts to account for a longer period during which inflation will supersede its ceiling of 2% (HICP inflation, not PPI inflation). The pressure at the producer level in Germany mirrors a similar situation in the US. Producer level prices are soaring but consumer level prices have been better behaved even when we compare apples-to-apples (core goods PPI to core goods CPI). Are these pressures that are building up at the producer level going to spring forth in the coming quarters in the CPI (HICP)? Or, has productivity kept the pressures off the CPI and will these PPI pressures remain largely at bay? The ECB is worried about second round effects and is monitoring wage agreement as well as firms hiking prices to recoup past energy/food price gains. For the moment the results are unclear but the expected date for inflation’s return to below its ceiling is being pushed out and the ECB is remaining vigilant. The ECB expresses concerns about inflation as well as about slowing growth but has set policies only to keep inflation at bay. In the US the policy tact is the opposite. Since Germany gives us some of the better inflation trends in EMU, it’s no wonder that the ECB is so worried.