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Economy in Brief

HICP and Core Rate Are in Good Shape but Some Trends are Not
by Robert Brusca September 16, 2009

The EMU HICP finalized with August’s headline rate rising by 0.5% in and still dropping by 0.2% Yr/Yr. Core prices rose by 0.2% in August and rose by 1.2% Yr/Yr – a moderate result and indicating that inflation pressures are within the ECB’s HICP ceiling constraint. With headline inflation DOWN Yr/Yr the headline constraint is not going to be an issue for a while. Keeping inflation below 2% will be easy. But the core rate will provide better guidance as to what true inflation trends are doing when the energy sector is not bashing the headline rate hither and thither each month like a tennis ball caught in a long rally.

So far the picture is still a good one. Goods sector inflation is down by 1.5% Yr/Yr while service sector inflation is at 1.8% Yr/Yr. Goods inflation is off in the recent three-months but service sector inflation has locked in an increasing trend with six month inflation at 3.1% and three-month services inflation at 4.7%. That trend is a more than a bit uncomfortable.

At the country level core inflation (excluding food, energy and alcohol) is well behaved over twelve months with Germany France Italy and Spain each with 12-month rates below 1.5%. But over the shorter horizons things get dicey. Only Italy shows a core rate that is not accelerating. There the core HICP is up by 0.7% over three-months when annualized. For Germany, France and Spain core inflation has accelerated to a pace of 1.6%, 1.4% and 1.9% respectively. Those are uncomfortable results.

Europe remains a troubled economic zone, even as it is engaged in the recovery process. Recovery is not instantaneous; those who are displaced have to live through the process until they are re-engaged in economic activity. And the weaker than expected IFO survey for Germany has economists thinking that the EMU recovery will be slower rather than faster. Still at such an early stage of recovery and with the upswing still nascent, the ECB’s ceiling for headline inflation at 2% implies a lot of room for discretion but the core rates are doing things that are troublesome and testing that flexibility. It will be interesting to see how the ECB handles this delicate proposition. At least it has a rising exchange rate to help fend of any imported inflation. With the headline rate under wraps The ECB does have some time, but when nettlesome inflation trends are present the ECB has not been known for its patience. Yet the currency is so strong that the ECB probably does not want to signal that it is closer to the upside of the cycle for interest rates. The ECB has a dilemma in the making. Core inflation trends yet could evaporate. But unless they do the ECB is on a collision course with some hard and unpopular decisions.

Trends in HICP
  % mo/mo % saar
  Aug-09 Jul-09 Jun-09 3-Mo 6-Mo 12-Mo Yr Ago
EMU 0.5% -0.3% 0.3% 2.0% 0.6% -0.2% 3.8%
Core 0.2% 0.0% 0.1% 1.5% 1.4% 1.2% 2.6%
Goods 0.4% -1.7% 0.2% -4.1% 0.1% -1.5% 4.6%
Services 0.2% 0.8% 0.1% 4.7% 3.1% 1.8% 2.7%
Germany 0.7% -0.5% 0.5% 2.6% 0.6% -0.1% 3.3%
France 0.5% -0.1% 0.2% 2.4% 0.6% -0.2% 3.5%
Italy 0.5% -0.6% 0.3% 0.7% 0.9% 0.1% 4.2%
Spain 0.7% 0.1% 0.4% 4.9% 1.3% -0.7% 5.0%
Core excl Food Energy & Alcohol
Germany 0.4% 0.1% 0.2% 2.7% 1.7% 1.2% 1.9%
France 0.3% 0.1% 0.1% 1.6% 1.4% 1.4% 2.3%
Italy 0.5% -0.4% 0.1% 0.7% 1.3% 1.2% 3.2%
Spain 0.1% 0.2% 0.2% 1.9% 1.1% 0.5% 3.5%
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