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Economy in Brief

French Inflation Continues to Escalate Over the Top
by Robert Brusca June 11, 2008

Bad news for the ECB…

France and the EMU ceiling - France’s HICP rate rose by 0.5% in May 2008; its own domestic CPI measure rose by 0.4% with a tempered core of +0.1%. The HICP core rate is not yet available. But both the HICP and the French domestic CPI readings show accelerating headline inflation and that is what the ECB targets and tries to limit. France’s 3.7% Yr/Yr HICP headline gain is nearly DOUBLE the EMU-wide limit of 2% imposed by the ECB. If inflation were to get a ticket for this it would be for reckless driving. If you were driving above the 65mph speed limit to the same degree of excess, you would be traveling at 120mph.

ECB and its inflation ceiling - No wonder the ECB wants to hike rates. The ECB has been below the top of its inflation speed-ceiling in only 4 of the past 49 months. In Sept and Oct of 2005 the pace hit 2.7% and 2.8% Yr/Yr then receded. In May and June of 2006 it hit 2.7% Yr/Yr again, then receded. While many divergences have occurred, for the most part, they had been on the orders of 0.5% or less on a 12-month inflation rate --that is until late 2007. From October to November of 2007 the pace jumped from 2.7% to 3.3%; it rose to 3.6% in April. We await the EMU-wide rate for May.

France’s pressures are getting worse - France’s experience with inflation seems to be typical rather than unusual for an EMU nation. The news for May is that things are getting worse. Diffusion measures on inflation acceleration show that 72% of the domestic French CPI categories are accelerating over three months compared to six months using annualized rates. And, over six months compared to Yr/Yr trends, the acceleration tendency also was greater in 72% of the categories. Inflation is on a clear widespread rising trend in France and probably elsewhere in EMU as well.

ECB trying to keep its credibility intact - No wonder the ECB feels is has lost control and wants to hike rates again. Even so, one suspects that there is a lot of ‘hike for show’ not ‘for dough’ in this planned move. The ECB does NOT WANT to choke off growth even though it has no growth mandate. It does not want to send the euro spiraling higher either. It wants to get control of inflation. But it realizes that targeting headline inflation as oil prices rise is a losing game.

Does the ECB have the dilemma of having the WRONG target? The ECB IN FACT cannot control the rate it claims to target, at least not in the short - or even intermediate - run. It can corral it eventually and it can, though anchoring inflation expectations have somewhat better medium term success with the core rate. But that rate has not been made part of the targeting/ceiling process in any way. So viewed in a pure way the ECB is simply blowing it big time. It undoubtedly feels that to regain or maintain credibility it must be seen doing something in the face of this new inflation surge. I conclude that this is a desire to hike rates more ‘for show than for dough’ due to Juergen Startk’s comment this morning that the ECB seeks a rate hike, not a series of hikes. If the ECB wanted to contain inflation here and now it would take a series of hikes and it would also take the onset of recession since the headline overshoot is simply too big to handle with subtlety.

ECB is acting as the Fed would while the Fed has inflation corralled - Despite all the ECB macho rhetoric it is acting more like Fed would in its position. Indeed, the difference is that he Fed informally targets a Core rate of inflation at 2.4% for the CPI and with its core-CPI pace rising by 2.5% Yr/Yr the Fed can claim virtual success despite the headline inflation rate that is worse than the one in Europe. Still, in the US people wonder why target the core when they have to live in the real world and pay headline inflation since everyone uses fuel and food. So even the Fed’s inflation fighting success relative to its soft ‘target’ has not bought it credibility

Policy credibility Vs integrity… It is interesting to ponder whether credibility/integrity is better served by targeting the headline rate everyone sees and pays but that you cannot control at all or the core rate you can influence but will be criticized for having when a gap opens up between it and headline inflation. In either case Central banks seem to need some rhetoric (that is lacking) to inform the public of how their approach will work – to bridge either the credibility gap (missing the target) or the policy integrity gap (hitting the wrong one). All we hear from these banks is that they will not let inflation run wild. Still in the case of the Fed or the ECB in 2008, headline inflation is such that it can hardly be called under control. While I, as an economist, give both these banks credit for limiting (so far) the pass-through into core inflation, they are both lacking in their willingness to get detailed with the public about what is going on and how their plan will successfully keep inflation in check. It’s an interesting dilemma. In the case of the ECB it is a numeric ceiling that has been exceeded nearly every month over the past four years. In the case of the Fed it’s a vague pledge to control inflation buttressed by a number that has no formal status and a pledge to control an inflation rate that people think is not the right one. France’s May consumer prices report suggests that this dilemma will be with us for some time.

France HICP and CPI details
  Mo/Mo % Saar % Yr/Yr
  May-08 Apr-08 Mar-08 3-Mo 6-Mo 12-Mo Yr Ago
HICP Total 0.5% 0.1% 0.5% 4.6% 3.8% 3.7% 1.1%
Core #N/A 0.1% 0.4% #N/A #N/A #N/A 1.4%
All 0.4% 0.1% 0.5% 4.0% 3.5% 3.3% 1.1%
CPI excl food and energy 0.1% 0.2% 0.3% 2.5% 2.2% 2.3% 1.3%
Food 0.6% 0.5% 0.2% 5.6% 6.8% 6.0% 0.9%
Alcohol 0.1% 0.3% 0.3% 2.8% 2.4% 4.9% 0.5%
Clothing & Shoes 0.0% 0.2% 1.0% 4.6% 0.8% 0.7% 0.7%
Rent & Utilities 1.0% 0.2% 0.3% 6.3% 5.6% 5.6% 2.1%
Health Care -0.2% -0.1% 0.1% -0.5% -0.2% 0.3% 0.1%
Transport 1.0% -0.2% 1.0% 7.6% 6.3% 6.1% 1.6%
Communication 0.6% 0.1% 2.7% 14.4% 2.6% 2.1% -0.7%
Recreation & Culture -0.1% -0.4% 0.0% -1.7% -1.9% -1.6% -1.9%
Education 0.2% 0.2% 0.2% 2.7% 3.2% 3.0% 2.4%
Restaurant & Hotel 0.2% 0.2% 0.4% 3.5% 3.4% 2.9% 2.8%
Other 0.1% 0.4% 0.2% 3.1% 1.9% 1.9% 2.2%
Diffusion       72.7% 72.7% 90.9%  
Type: Diffusion: Compared to 6-mo 12-mo Yr-Ago --
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