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Economy in Brief

EMU HICP Spurts as ‘Core’ Edges Higher
by Robert Brusca June 16, 2008

Ever since Germany revised up its preliminary HICP for May the EMU HICP preliminary result has been on notice for an upward revision too. Today that rate was revised up to 3.7% from 3.6%, a small uptick, yes, but in the wrong direction and at the wrong time. The ECB already is very concerned about inflation and recent labor market activity saw wage inflation rise to 2.7% in 2008-Q1 from a pace of 2.2% in 2007-Q4. Various ECB commentators keep reminding us that the ECB could raise rates at its next meeting.

Still the ECB is doing well, as well as can be expected, on inflation. Its ‘core’ inflation rate, what we could call core ex-sin inflation since it excludes alcohol and tobacco as well, is under control. On this measure the ECB is doing well as inflation on this core measure ticked up to 1.7% from 1.6% previously. It stands under the ECB’s ceiling rate much as the Core CPI in the US stands inside the Fed’s so-called comfort zone. Except the ECB has NO SEPARATE ceiling for core inflation. So, to the ECB, this moderate core pace is no cause to celebrate, at least not in public.

Last week we heard from two ECB members on the subject of prospective ECB rate hikes. Jurgin Stark, a notable hawk, said that the ECB was not planning a series of rate hikes.

What I infer from all this ECB jockeying around is that inflation in the zone is actually quite contained apart from the uncontrollable short term commodity prices that are in the mix.. The ECB has a ceiling rate at 2% and has been violating it for far too long. It feels, for credibility’s sake, it must do something. It has been prevailed upon to defer hiking rates while the banking crisis was so bad but now it will do something.

Still the ECB is not under any illusions. It knows that it cannot in any quick way get inflation back below its ceiling as long as we are in such a strong transition period for oil prices. To try and squeeze inflation back to 2% in a short period would be more forceful and act for the economy than even the old Bundesbank would have contemplated.

It seems that the ECB has opted to live with the inflation overshoot and to hike rates again to give a clear signal that it is still fighting to reduce the rate of inflation. Its rhetoric may continue after the rate hike since the ECB is desperately concerned with getting control of inflation again and with anchoring inflation expectations. In the meantime it must at least continue to posture against the overshoot with verbiage and maybe even occasional actions if the price shocks continue. But there is no program of rate tightening in store that is intended to corral the rogue HICP headline. Energy’s dramatic rise makes that strategy simply too dangerous even for the world class inflation hawks.

Trends in HICP
  % mo/mo % saar
  May-08 Apr-08 Mar-08 3-Mo 6-Mo 12-Mo Yr Ago
EMU-13 0.6% 0.0% 0.5% 4.2% 3.5% 3.7% 1.9%
Core 0.2% -0.1% 0.4% 2.3% 2.5% 2.4% 1.9%
Goods 0.8% 0.6% 1.4% 11.8% 5.3% 4.5% 1.4%
Services 0.4% -0.1% 0.4% 2.6% 3.7% 2.5% 2.6%
Germany 0.6% -0.4% 0.4% 2.3% 1.9% 3.0% 2.0%
France 0.5% 0.1% 0.5% 4.6% 3.8% 3.7% 1.1%
Italy 0.4% 0.0% 0.6% 3.8% 4.0% 3.7% 1.9%
Spain 0.7% -0.1% 0.4% 4.1% 4.3% 4.7% 2.4%
Core excl Food Energy & Alcohol
Germany 0.3% -0.5% 0.4% 0.8% 1.2% 1.8% 2.1%
France 0.1% 0.1% 0.4% 2.4% 2.6% 2.4% 1.4%
Italy 0.2% -0.1% 0.7% 3.1% 2.9% 2.7% 1.9%
Spain 0.3% -0.1% 0.3% 2.2% 2.7% 3.3% 2.5%
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