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Economy in Brief

Core Inflation in the EMU and in the US Falling Last
by Brusca Robert January 15, 2009

The EMU inflation picture was finalized with headline inflation dropping by 0.3% in the month and up by 1.6% Yr/Yr as had been reported in the flash release. With today’s report we get the detail behind the headline.

Inflation is falling sharply for goods as the progressive growth rates show over shorter horizons the pace of declines getting greater. That is not true of services, however, there inflation is stuck and has even notched up over three-months. Still, for the overall and core rates inflation is decelerating and for the key headline series for which the ECB imposes a ceiling, the pace of inflation is now below that ceiling for 3mo, 6-mo and 12-mo inflation calculations, but most importantly for the 12-mo series that the ECB emphasizes.

Still we present a graph above showing the core rate compared with that same rate in the US. For Core inflation the two rates have had different cycles for this two economic groups and some considerable divergence in recent years. But now the core, which is as good a short hand as we have for TREND inflation, is showing a sharp decline for inflation in the US and well as in EMU.

The most recent synchronous declines in inflation came in 2002 and 2003 with another minor episode in 2005.

Since 2004 US and EMU inflation trends have been doing different things. Over this period EMU inflation has accelerated until the recent peaking and deceleration. In the US inflation has mostly moved sideways during this period but with some considerable volatility. US Core inflation rose from early through late 2006 before oscillating in range- a range from which it is now declining. As a result the current US core inflation rate is the lowest realm we have seen since mid 2004. For EMU core inflation is only back to late 2007 levels. Even a casual look at the chart and the table above shows why some ECB hawks have been reluctant to cut rates. EMU core inflation has been much more in the mode of accelerating than has core inflation in the US. Even as the headline rate plummets, EMU service sector inflation is showing some unexpected - and sometimes unrecognized - resilience. So despite the EMU rate cut we can only wonder how much these trends will limit flexibility in the ECB monetary policymaking in the months ahead..

Trends in HICP
  % 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% -2.6% -0.9% 1.6% 3.1%
Core 0.1% 0.1% 0.2% 1.7% 1.8% 2.1% 2.3%
Goods -0.8% -0.8% 0.0% -6.1% -4.1% 0.9% 3.4%
Services 0.8% -0.1% 0.1% 3.3% 2.6% 2.6% 2.5%
Germany -0.5% -0.1% -0.3% -3.3% -0.9% 1.1% 3.1%
France -0.3% -0.4% 0.1% -2.5% -1.6% 1.2% 2.8%
Italy 0.0% -0.5% 0.3% -0.7% 0.2% 2.4% 2.8%
Spain -0.4% -0.4% -0.3% -4.2% -1.5% 1.4% 4.3%
Core excl Food Energy Alcohol              
Germany 0.3% 0.1% -0.1% 1.1% 1.7% 1.2% 2.5%
Italy 0.3% 0.0% 0.5% 3.0% 2.5% 2.8% 2.3%
UK #N/A 0.2% 0.0% #N/A #N/A #N/A 1.8%
Spain 0.1% 0.1% 0.1% 1.3% 2.2% 2.4% 3.4%
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