· The inflation story in EMU/EU is clear but not uncomplicated. Inflation at 4% Yr/Yr has accelerated in terms of its headline the only measure the ECB claims to have designs on. But oil prices have dropped. That should pave the way for better times ahead. Mover over, the core rate of inflation is 2.5% Yr/Yr - still ‘too high’ - but its sequential growth rates show that core inflation has been decelerating over the recent 6-mos and three months. Moreover, this core deceleration is observable across some key EMU countries including Italy.

· The most troublesome inflation patterns are in the UK. The BOE has the same 2% inflation ceiling as the ECB. But its headline Yr/Yr inflation rate is at 7.3% and really accelerating. Core UK inflation also is blowing up at a 2.2% rate Yr/Yr, 2.9% over six months and 3.9% over three months. 

· The breakdown in global oil prices is good news for all central banks, but the ECB is still in a bit of an inflation fix. The ECB is getting in a more nettlesome position since its economy is starting to show more pronounced weakness as core inflation abates. It challenge – one it has not faced yet -- might be how to deal with fading but still over-the-top inflation as growth begins to unwind more sharply.

Trends in HICP

% mo/mo

% SAAR

Jun-08

May-08

Apr-08

3-Mo

6-Mo

12-Mo

Yr Ago

EMU-13

0.5%

0.6%

0.0%

4.1%

4.1%

4.0%

1.9%

Core

0.2%

0.2%

-0.1%

1.3%

2.3%

2.5%

1.9%

Goods

0.4%

0.8%

0.6%

7.6%

6.0%

4.9%

1.5%

Services

0.3%

0.4%

-0.1%

2.2%

2.5%

2.5%

2.6%

HICP

Germany

0.5%

0.6%

-0.4%

2.7%

3.2%

3.4%

2.0%

France

0.5%

0.5%

0.1%

4.5%

4.0%

4.0%

1.3%

Italy

0.6%

0.4%

0.0%

4.2%

4.6%

4.0%

1.9%

UK

0.6%

0.5%

0.7%

7.3%

5.4%

3.8%

2.3%

Spain

0.6%

0.7%

-0.1%

4.9%

4.5%

5.0%

2.4%

Core excl FE&A

Germany

0.1%

0.3%

-0.5%

-0.4%

0.8%

1.8%

2.1%

Italy

0.4%

0.2%

-0.1%

1.9%

3.1%

3.0%

1.9%

UK

0.3%

0.3%

0.4%

3.9%

2.9%

2.2%

2.2%

Spain

0.3%

0.3%

-0.1%

2.2%

2.6%

3.4%

2.5%