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Economy in Brief

PPI Pressures Continue To Rise In Germany: Do We Care?
by Robert Brusca July 20, 2010

Off to the races - The German PPI excluding energy continues to show an escalating pace of inflation for each horizon and the patterns shows that acceleration is still the order of the day. Prices are advancing faster over three months than over six months and faster in six months than over 12-months. It has been that way with one minor exception since the turn of the year.

Acceleration! - In June the overall PPI excluding the construction sector jumped by 0.5%. Over the past three months it is up by 0.5% 0.1% and 0.7%. This amounts to an annual rate of 5.3%. It's the same as the pace over three months and a marked acceleration from the 1.7% Yr/Yr rise in the index. In the just-concluded quarter, the PPI is rising at a slightly stronger 5.4% annual rate.

ExcedrinTM headache number 2010? Clearly PPI trends offer little solace to the Bundesbank or to the ECB.

Mars Vs Venus - But the PPI is not the preferred inflation barometer in Germany or in the Euro-Area. The chart above shows that PPI inflation bears a weak correlation with the CPI even when the volatile energy sector is stripped out of both of the series. The PPI bears no consistent relationship to the CPI in terms of the various inflation cycles either. In 2001 the Ex energy PPI peaked first. In the 2004 inflation cycle it peaked second. In the current cycle it made a double peak around the peaking of the ex energy CPI. Currently, while the ex energy CPI in Germany is on a steady decline in its Yr/Yr rate of change, the PPI has plunged and now on a new path that is ratcheting higher.

What policymakers watch Vs what they fear - The PPI is not really a gauge to worry about if you are trying to get one-step ahead of the policymakers. Of course, the Germans have a special inflation phobia and so even an unreliable gauge is likely to give them goose bumps even when they do not focus on it if it is going haywire. The policymakers might set it aside but they will still be watching it closely. In the case of Germany it hates inflation and always tries to keep it low with undesirable trends bay. Even when a less reliable index begins to inflate that gets some consideration. But in the main the Germans do look at the HICP and so does the ECB. For now the rising PPI is a nuisance. Let's hope it stays that way- or better yet - diminishes. In fact that course seems the more likely one with growth indicators slowing and commodity prices off peak and the ex energy CPI trending lower.

Germany PPI
  %M/M %-SAAR
  Jun-10 May-10 Apr-10 3-mo 6-mo 12-mo 12-moY-Ago IN Q2
PPIxConst 0.5% 0.1% 0.7% 5.3% 5.3% 1.7% -3.0% 5.4%
 Ex Energy 0.2% 0.5% 0.5% 4.7% 3.9% 2.1% -2.8% 4.5%
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