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Economy in Brief

EMU Inflation Really Does Turn Lower and Higher, Too 
by Robert Brusca July 15, 2009

EMU inflation remained tempered in June; the Yr/Yr rate even turned negative! Headline inflation’s trend, however, is actually doing a slow up-creep as energy prices dived and have since begun to rise. But that was through June. Recent energy market events suggest some of that rebound may be giving way. But with oil you can’t be sure. The ECB practice of ‘targeting’ headline inflations surely suffers a lot in times like this. The Fed’s preference to look at core inflation certainly looks superior and was a much better, more consistent, guide to policy in the recession and before when energy prices soared.
Energy prices never did affect the Fed’s preferred core measure of inflation much, while the ECB needed the ‘cover’ of an international rate cut to allow it to cut rates with inflation still screaming over the top of its target and the financial sector in dire need of a rate cut. Maybe someday the ECB will see the error in its ways.

Core inflation technically has perked up slightly in June but it’s really hovering around the 1% mark. While there is tendency to look at such a mild acceleration as a non-event, the data across key EMU countries (where available) show that both core and headline inflation are engaged in an acceleration from 6-months to three-months. Germany’s core rate has accelerated from 12-months to six months as well.

With central banks having pumped a lot of liquidity into markets there are investors on edge and on an inflation watch despite the fact that some bankers still warn of a deflation threat. This report embodies all those oddities by having such low inflation – indeed a rate that drops year-over-year- but at the same time emits signs of inflation acceleration. The IMF has been cautioning countries not to wind their easing yet. But, if these inflation trends press ahead, there will be a moment of conflict not too far down the road.

The Fed has all-but-pledged to keep the stimulus on ‘longer’ noting that the BIG MISTAKE in past financial episodes has been for the central bank to let up too soon. The subtext of that message is that the Fed will not have a hair-trigger response to rising inflation despite concerns about its bloated bank reserve base. US core inflation and core is above the pace in EMU and even above the pace in Germany. While 1.5% to 1.8% to 2.0% core pace (core ex tobacco) step up in the US over, respectively, 12-mos to 6-mos, to 3-mos, is not severe, it is above Europe’s profile. With huge increases in the bank reserves in the US one wonders how long until some sort of inflation concern grips markets?

For now the recent flirtation with renewed economic weakness has trumped any concerns about inflation. It is also true that even core inflation often shows pressure when energy prices rise and the rise from energy this month was severe. This pressure too may pass. Still, there is a risk that policymaking is about to get more interesting. Perhaps the US and Europe are getting closer to a period when their policy directions will even diverge. That would have an interesting impact on currency markets.

Trends in HICP
  % mo/mo % saar
  Jun-09 May-09 Apr-09 3-Mo 6-Mo 12-Mo Yr Ago
EMU 0.3% 0.0% 0.0% 0.9% 0.4% -0.2% 3.9%
Core 0.1% 0.0% 0.1% 1.0% 0.9% 1.3% 2.5%
Goods 0.3% 0.1% 0.4% 2.8% 1.1% -1.5% 5.0%
Services 0.1% 0.1% 0.4% 2.2% 1.2% 1.9% 2.5%
               
HICP              
Germany 0.5% -0.2% 0.0% 1.1% 0.7% 0.0% 3.4%
France #N/A 0.0% -0.1% #N/A #N/A #N/A 4.0%
Italy 0.3% 0.0% 0.2% 1.9% 0.7% 0.5% 4.0%
Spain 0.0% -0.1% -0.1% -0.9% -1.4% -1.5% 5.0%
Core excl FE&A              
Germany 0.2% -0.1% 0.3% 1.5% 1.3% 1.2% 1.7%
Italy 0.1% 0.1% 0.1% 1.1% 0.9% 1.6% 3.0%
Spain 0.2% 0.0% 0.0% 0.8% -0.3% 0.8% 3.4%
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