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Economy in Brief

EMU CPI in Near-Record Drop HICP is Barely Over the ECB Ceiling-Freeing Bank to Slash Rates 
by Robert Brusca November 28, 2008

The Euro Area reported a dramatically deflated CPI (HICP, Harmonized index of consumer prices) for November. The index dropped its rate of inflation back to 2.1% from 3.2%, a huge deceleration (in one month!) for yr/yr inflation that owes to the plunge in world oil and energy prices. With a self-imposed limit for headline consumer inflation of 2% the ECB can now feel it is no longer in violation of the spirit of its ‘guideline’. And with inflation falling so sharply a forward-looking expectation of being inside the target would be prudent and reasonable.

Core inflation in the EMU is still not available. But the history shows that that measure has been much better corralled overall. Through October the three-month pace for core inflation was 2.4% compared to 2.4% for Yr/Yr core inflation.

Of course the ECB has long since jettisoned any such technical concerns of being in violation of its ceiling, as it has joined other central banks in a round of international rate-cutting. The ECB recognizes the downside risks but still has had this issue with the inflation rate being so far over its ceiling. The drop in the rate this month may be all the more important as the Federal Reserve in the US is pulling out even more stops to lend to banks and issue liquidity as well as to target mortgage rate reductions with a panoply of moves that have some Fed critics warning of inflation consequences even as the economy faces what could be a quarter of -5% real growth (annualized).

In such an environment the ECB at least has the comfort of getting its inflation rate back close enough to target range that it can again feel that it is making policy with some degree of comfort, prudence and discretion.

Still, there should be no sense that all is well. The drop in headline inflation merely gives the ECB its appearance of propriety back - not its ‘Mo-Jo.’ The Federal Reserve in the US has made the most moves of any central bank but part of its mix of policies has been to provide swap facilities for dollars to aid central banks abroad. Central banks are still ‘riding the tiger’. About a week ago US Treasury Secretary Paulson dared to commit the ‘in-crisis’ error of saying that banks had been stabilized, only to find that that they had not as Citigroup saw its stock drop and a new special action by the Fed/treasury was required. Clearly the financial situation remains fragile though it appears to be less degenerative than it was. Now policymakers are turning attention more to the economy. At a time like this with Europe looking weaker and the German economy set to import a good deal of weakness from trade as its exports drop, the ECB can use an extra-measure of flexibility. It is hard to say that this drop in inflation came ‘just in time’ but at least we can say ‘better late than never’.

Trends in EMU HICP; Flash Index
  % mo/mo % saar
  Nov-08 Oct-08 Sep-08 3-Mo 6-Mo 12-Mo Yr Ago
EMU-13 -0.3% 0.0% 0.1% -0.8% 0.7% 2.1% 3.1%
Core #N/A 0.2% 0.1% 2.4% 2.2% 2.4% 2.1%
Goods #N/A 0.0% 0.8% 1.4% 1.4% 3.5% 2.6%
Services #N/A 0.1% -0.7% -1.3% 2.5% 2.6% 2.5%
HICP              
Germany 0.0% -0.3% 0.2% -0.4% 1.1% 1.5% 3.3%
France #N/A 0.1% 0.0% -0.7% 1.8% 3.0% 2.1%
Italy -0.4% 0.3% 0.0% -0.4% 1.7% 2.8% 2.6%
UK #N/A -0.4% 0.6% #N/A #N/A #N/A 2.1%
Spain #N/A -0.3% 0.0% -1.5% 2.6% 3.6% 3.7%
Core:xFE&A            
Germany #N/A -0.1% 0.0% 0.8% 1.7% 1.5% 2.1%
Italy #N/A 0.5% 0.0% 4.6% 3.0% 3.0% 2.1%
UK #N/A #N/A 0.0% #N/A #N/A #N/A 1.8%
Spain #N/A 0.1% 0.1% 2.4% 3.1% 2.9% 3.1%
Blue shaded area data trail by one month.
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