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Economy in Brief

EMU HICP In Large Yr/Yr Drop 
by Robert Brusca  August 14, 2009

The EMU HICP fell by a larger than expected 0.7% Yr/Yr. But with France and Germany emerging from recession in yesterday’s GDP reports, markets are not focused on inflation being under control or worried about deflation with the Yr/Yr drop, but instead worried that inflation is going to be a problem sooner rather than later. Isn’t that just like markets? Nothing is what is seems.

Forecasts made up to this point have been assuming that Europe was going to remain weak for some time. Now with the early exit from recession by Germany and France and the small drop in EMU GDP in 2009-Q2, inflation forecasts are beginning to get a re-think.

Ex food and energy inflation in EMU is at +0.6%. The core measure of inflation was flat in July, up by 0.1% in June and flat in May. There isn’t exactly any news saying inflation is building momentum here.

Moreover, although Germany and France have ‘existed recession’ they have done so in a most peculiar way. And before calling it the ‘end of recession’ perhaps we should wait and see what has been cooked into its GDP stew. As we pointed out in the write–up of European GDP yesterday, the diffusion indicators that track the various sectors across European nations and in EMU are still at very depressed levels. This has to conjure up concerns of what ether GDP rose upon in Q2 and if those fumes will still have lifting force in 2009-Q3.

In short, it seems a bad time to start to raise inflation forecasts and fears. The EMU-wide HICP is in a strong drop; it is not covering for any inflation under the surface and the surprising growth served up by several European economies is equally surprising after the fact as we try to understand it. Is that real and is it really a basis for concerns about STRONG growth?

The bottom line is that inflation is under control in Europe and barring something exceptional - that we have not yet seen -- it should stay that way.

Trends in HICP
  % Mo/Mo % Saar
  Jul-09 Jun-09 May-09 3-Mo 6-Mo 12-Mo Yr Ago
EMU -0.3% 0.3% 0.0% -0.2% 0.2% -0.7% 4.0%
  Core 0.0% 0.1% 0.0% 0.6% 1.3% 1.2% 2.5%
Goods -1.7% 0.2% 0.1% -5.5% -0.1% -2.4% 5.1%
Services 0.8% 0.1% 0.1% 4.1% 3.7% 1.9% 2.6%
Germany -0.5% 0.5% -0.2% -0.7% -0.2% -0.7% 3.5%
France -0.1% 0.2% 0.0% 0.3% 0.3% -0.8% 4.0%
Italy -0.6% 0.3% 0.0% -1.1% 0.7% -0.1% 4.1%
Spain 0.1% 0.4% -0.1% 1.7% 0.3% -1.4% 5.3%
Germany 0.1% 0.2% -0.1% 0.8% 1.7% 1.1% 1.8%
Italy -0.4% 0.1% 0.1% -0.7% 1.3% 1.3% 2.8%
Spain 0.2% 0.2% 0.0% 1.3% 0.5% 0.7% 3.5%
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