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Economy in Brief

Flash Dance - Inflation Waltzes to New Lows as Risk Soars to Dizzying Heights
by Robert Brusca March 31, 2009

Fat Chance…
The EMU FLASH HICP is at an all time low skinny 0.6% gain Yr/Yr. If it were human we’d say it is anorexic. Italy also got on the board with a weak HICP, posting the lowest reading since ‘Ed Sullivan’ and ‘Leave it to Beaver’ were first run shows. (roughly 1968).

Gooey Good News
Despite al this gooey good news the pace of inflation’s drop actually is slowing, not speeding up. The Yr/Yr at 0.6% is higher than the six month pace of -1.4% but then over three-months the pace flattens at 0%. Core inflation is still stepping down. But we know what is going on and what is driving these trends. Headline inflation is driven by food and energy and in this cycle energy has taken the wheel, not some deity. Spot oil prices had collapsed but the have climbed back to the vicinity of $50.bbl. It is hard to tell where oil goes short term, but prices are the up from their lowest, meaning headline inflation will perform that same magic trick.

Peak oil not an issue now…
In broader terms inflation is clearly under control. When the world economy grows again there will once again be all those questions about peak oil or not. China is a new factor underpinning demand. But we can put those questions off for a while.

Reality bites and the OECD worries
For now, and for some time to come, inflation seems to be under control. The big news on our plate is the G-20 meeting and how policy will respond to the current diverse challenges. The OECD introduced a series of forecasts ahead of this meeting that have gotten even glummer. The OECD is urging more stimulus as a result. All this is going to put more pressure on the ECB to move rates lower, especially with Euro-stimulus policy in the shape it’s in. The summit seems to be a done deal as euro-stubbornness has won out. In addition French intransigence is trying to make headway as France has threatened to boycott if the regulation proposals are not enacted. Summit policy is always pre-determined but it isn’t always this clear.

Policy options are alive…but not well…not even good
All in all it is not really surprising with such economic weakness to find inflation is under control. That development puts more leeway in the hands of policymakers. But what happens when they refuse to take up the opportunity? Europe admits its 200bln euro plan will not have much impact until 2010. That was Junker’s contribution to the discussion today as the OECD ramped up the bad news. The US seems to be living in a different world where action is required while Europe sits back to watch. Some of this is that Europe already has a better social safety net than the US. But that is ‘cushion’ and what the world needs now is ‘stimulus,’ sweet stimulus. But it’s not happening in London. London 2009 will make the same mistake as London 1977. It will reject a chance for more stimulus and stretch out the pain. If London 1977 is a learning experience, it launched Bonn 1978 and the result was that too much stimulus was enacted too late. I hope that is not our true path. On the other hand part of me says, ‘Fat chance’.

Trends in EMU HICP: Flash Index
  % mo/mo % SAAR
  Mar-09 Feb-09 Jan-09 3-Mo 6-Mo 12-Mo Yr Ago
EMU-13 -0.1% 0.3% -0.2% 0.0% -1.4% 0.6% 3.6%
Core #N/A 0.2% -0.2% 0.6% 1.1% 1.7% 2.4%
Goods  #N/A 0.3% -1.2% -6.3% -3.2% 0.3% 3.8%
Services #N/A 0.5% -0.4% 3.9% 0.6% 2.4% 2.5%
Germany -0.2% 0.3% 0.0% 0.4% -1.3% 0.4% 3.3%
France #N/A 0.3% -0.1% -0.3% -1.0% 1.0% 3.2%
Italy 0.0% 0.4% -0.6% -0.7% -0.9% 1.0% 3.5%
Spain #N/A 0.2% -0.4% -2.4% -2.7% 0.7% 4.4%
Core excl Food Energy & Alcohol            
Germany #N/A 0.4% -0.1% 1.5% 0.8% 1.2% 2.2%
Italy #N/A 0.5% -0.6% 0.4% 1.1% 2.2% 2.4%
Spain #N/A -0.2% -0.2% -1.3% -0.1% 1.6% 3.3%
Blue shaded area data trail by one month
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