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Economy in Brief

EMU Inflation Goes Ballistic - Over 4%; Ceiling Still is 2%
by Robert Brusca June 30, 2008

The EMU HICP is now over 4% Yr/Yr. this is not a good result for a central bank that has set a ceiling of 2% for headline inflation. It is also running at a pace of just over 4% over three-months and six-months. No detail of prices is yet available and only Germany and Italy have released public figures for June. The good news is that neither Italy nor Germany show accelerating trends in headline inflation. Their sequential growth rates are either mixed or pointing lower. But at 4% Yr/Yr Italian inflation is high and a 3.6% Yr/Yr German inflation, usually one of the lowest in the zone, is also high.

The ECB has an emerging credibility problem that will probably force its hand on a rate hike. But one as to wonder the usefulness of a target that is breached so baldy it has been doubled. While critics can pick at the Fed’s choice of the core rate to ‘monitor’ it has set out parameters for that rate’s range that US inflation still lies within. The core is contained even as headline inflation in the US surges over 4%. The Fed can claim victory but many don’t want to acknowledge it.

Europe has a policy credibility issue inflation has been above the ECB’s ceiling for far too along. In the US inflation is within the Fed’s boundaries but it is the Fed choice of boundaries that is a matter of debate concerning policy integrity. Central banks are having all sorts of issues maintaining their standing despite the success in holding core inflation low.

Still the fact is…
When oil prices flare so sharply, it is impossible to cushion the impact on inflation in the short run. The ECB thus has a credibility problem since its sole pledge is on headline inflation. It has not offered any cogent statement on inflation or an alternative to headline and has not suggested anything other than that inflation as it is remains unacceptable. Energy inflation is something special, since if the central bank can hold its impact on core inflation at bay it will also produce deflationary effects. No central banks gets good marks for their public relations stance in dealing with this issue in this cycle despite having had prior experience with energy inflation.

Trends in EMU HICP; Flash Index
  % 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% 4.3% 4.2% 4.0% 1.9%
Core #N/A 0.2% -0.1% 2.3% 2.5% 2.4% 1.9%
Goods #N/A 0.8% 0.6% 11.8% 5.3% 4.5% 1.4%
Services #N/A 0.4% -0.1% 2.6% 3.7% 2.5% 2.6%
Germany 0.5% 0.6% -0.4% 2.7% 3.2% 3.4% 2.0%
France #N/A 0.5% 0.1% 4.6% 3.8% 3.7% 1.1%
Italy 0.6% 0.4% 0.0% 4.2% 4.6% 4.0% 1.9%
Spain #N/A 0.7% -0.1% 4.1% 4.3% 4.7% 2.4%
Core excl Food Energy & Alcohol
Germany #N/A 0.3% -0.5% 0.8% 1.2% 1.8% 2.1%
France #N/A 0.1% 0.1% 2.4% 2.6% 2.4% 1.4%
Italy #N/A 0.2% -0.1% 3.1% 2.9% 2.7% 1.9%
Spain #N/A 0.3% -0.1% 2.2% 2.7% 3.3% 2.5%
Blue shaded area data trail by one month
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