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Economy in Brief

EMU Inflation: Now You See It; Now You Don't!
by Robert Brusca January 6, 2009

The EMU inflation rate fell sharply in December more sharply than have been expected. Headline inflation –the measure that the ECB sets a ceiling for -- is now below that ceiling of 2% at a Yr/Yr rate of 1.6%. A Yr/Yr rise of 1.8% had been expected. Core (ex food and energy inflation) has long been on a milder path than that of headline inflation. But the ECB sets a ceiling for the headline alone. Still, the headline pace is now more in line with the core where the pace Yr/Yr is 2.2% (lagged by one month since the December Core is not yet available- so the real up-to-date core rate is probably even lower). Core inflation, even through November, shows the six- and three-month rates of inflation are dropping fast. That is true for headline inflation as well, as the chart above amply demonstrates.

In short, the ECB now has a set of consistent signals about inflation. Inflation is now inside its preferred boundaries and falling. It faces an inflation pace that is well below its ceiling. It faces a weakening economy. Clearly this inflation result allows for the ECB policy to be much bolder and for its rhetoric to be much less circumspect. Even stodgy old central bankers should see the message clear and strong as indicating that economic weakness is more pronounced than expected, pushing down prices and not just allowing, but calling for more aggressive fiscal and monetary policy actions. The euro weakened in the wake of this report on precisely those sorts of conclusions by market participants.

Trends in EMU HICP; Flash Index
  % mo/mo % saar
  Dec-08 Nov-08 Oct-08 3-Mo 6-Mo 12-Mo Yr Ago
EMU-13 -0.3% -0.3% 0.0% -2.5% -0.9% 1.6% 3.1%
Core #N/A 0.1% 0.2% 1.6% 2.0% 2.2% 2.3%
Goods #N/A -0.8% 0.0% 0.1% -1.7% 1.8% 3.4%
Services #N/A -0.1% 0.1% -2.7% 1.5% 2.6% 2.5%
Germany -0.5% -0.1% -0.3% -3.3% -0.9% 1.1% 3.1%
France #N/A -0.4% 0.1% -1.4% 0.0% 1.9% 2.6%
Italy -0.1% -0.5% 0.3% -1.1% 0.0% 2.3% 2.8%
Spain #N/A -0.4% -0.3% -2.4% 0.5% 2.4% 4.1%
Germany #N/A 0.1% -0.1% 0.0% 1.3% 1.3% 2.4%
Italy #N/A 0.0% 0.5% 1.9% 2.7% 2.8% 2.2%
UK #N/A 0.2% 0.0% 0.8% 2.3% 2.5% 1.8%
Spain #N/A 0.1% 0.1% 1.5% 2.6% 2.7% 3.3%
Blue shaded area data trail by one month
large image