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Economy in Brief

Strong Euro Reduces Energy Impact on European Inflation
by Carol Stone April 14, 2004

In addition to the US, a cluster of countries reported March CPI data today. For most, there was little movement in overall inflation on a year-to-year basis. Rates were steady between February and March, as in Italy, where divergent moves among food (faster) and communications prices (slower) were offsetting. France saw a slight downtick and Sweden, less deflation. (Finland, Hungary and Malaysia also released CPI data today, and while those data are updated in Haver databases, we make no comment on them here.)

A common thread among the European nations is the role of energy prices in recent months. In the US, consumer energy prices surged in January, February and March. As seen in the table below, they added notably to inflation in January, 0.4%, and February, 0.2%. They continued rising in March, but a rapidly rising base for the 12-month rate in early 2003 reduced the year-on-year increase. This impact contrasts with European energy prices. The table shows that for both Germany and France, total CPI inflation is LESS than inflation ex energy, that is, the prices for the same energy products which raised inflation in the US reduced inflation in Europe.

The steeply falling dollar must surely be a major cause of this divergence, since the world prices of crude oil and refined products are quoted in dollars. The chart above illustrates this impact. The right-hand scale shows the strengthening Euro. The left-hand scale shows a ratio of the energy component in the German CPI to that in the US data. As the euro has risen, this ratio has fallen markedly. And in fact, energy prices in Germany have actually been lower than a year ago in the last three months. It's not just that there's been less inflation in the energy sector in Germany, but price levels have fallen outright. The same situation exists in France. However, the dollar began to firm in March, so perhaps this seeming anomaly of oil that is simultaneously more expensive and cheaper will dissipate.

12-mo % Changes Mar Feb Jan 2003 2002 2001
US 1.7 1.7 1.9 1.9 2.4 1.6
  Ex Energy 1.8 1.5 1.5 1.5 1.9 2.7
Euro Exchange Rate (avg.) 1.2261 1.2640 1.2638 1.1317 0.9453 0.8955
Germany 1.1 0.9 1.2 1.1 1.2 1.6
  Ex Energy 1.4 1.2 1.3 0.8 1.1 1.9
France 1.7 1.8 2.0 2.2 2.3 2.4
  Ex Energy 2.1 2.1 2.2 2.4 2.1 2.2
Italy 2.3 2.3 2.2 2.5 2.8 2.4
Sweden -0.1 -0.4 0.7 1.3 2.1 2.7
Underlying Inflation Rate 0.4 0.1 1.1 1.7 2.2 3.4
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