Recent Updates

  • UK: Public Sector Finance (Q1)
  • France: Registered Unemployment & Vacancies (Mar), Monthly Household Survey (Apr)
  • Germany: Construction Orders, Employment, & Turnover (Feb), IAB Labor Market Barometer, IFO Business Climate Survey (Apr)
  • Saudi Arabia: WPI (Mar); Israel: Person-Nights in Tourist Hotels (Mar)
  • Norway: Earnings (2017)
  • Austria: Industrial Production, New Orders (Feb)
  • more updates...

Economy in Brief

Euro-Area inflation begins to creep up...As US fears its rate is creeping lower - this should be interesting
by Robert Brusca   October 14, 2010

Trends under the surface - The final inflation number for the Zone in September is not yet in and core readings are missing as well. But we can look at the inflation trend by perusing the various trends in a number of 'early-reporting' Euro-Area members. By looking across their data we get a better sense of what is going into the Euro-stew it calls inflation: the Euro-Area's HICP (Harmonized Index of Consumer Prices). What we find is that unlike the US where there is a 'concern' about deflation there is little worry about deflation in the Euro-Area judging from the price trends in the early reporting countries which include all the largest countries/

Inflation is your friend!
Of course, the first implication of this finding is that the euro will rise and the dollar will fall and that trend has been in train for a while. At the first whiff of 'QE' the dollar was in trouble but now trends on both sides of the Atlantic underpin this view. The US is almost 110% certain to go on a program of quantitative easing (called QEII). As it does this it hopes to reflate the economy and Fed members are speaking specifically about RAISING inflation expectations AS A POLICY GOAL. In all my life as a professional economist inflation has been the enemy and now finally the 'Saturday Night Live' skit starring the ersatz Jimmy Carter is becoming a reality (The 'Inflation is your friend,' skit starring Dan Aykroyd). The details can be found here.

Ok, not if you're long dollars...
That sort of policy tilt should push the dollar down as the Fed is considering very accommodative monetary policy. Meanwhile, back at the euro-ranch inflation is already being pressured up without any aid and if anything the ECB will be holding rates here or hiking them. Now it's premature to hike them and core inflation in the Zone is moderate and headline inflation is too, but it is the direction that matters here and the direction for inflation in the Zone is up.

Not de-coupling but out of sync; while the dollar is in sink
Macro policy and trends in the US and in Europe are dictating this Fx move. The US is getting what it wants but it may find that what is gets will become unwanted at some point. But the Fed side of the argument is focused on the very short run and its fear of longer-run risks. The ECB's Weber started yesterday a discussion of taking away the extra aid in the form of ECB bond buying of sovereign debt. In this month's policy statement the ECB is describing the Euro's value and seems to encourage the notion of a stronger euro by pointing out that is still below its 2009 average value. The Fed and the ECB are on very different pages even in the short run, but they have reached a point compatibility in the foreign exchange market.

Some have it bad but few have it good
In the Zone inflation is the most advanced in Greece where the price level is rising faster than anywhere else in the zone. And it is accelerating faster too. The chart I makes the point that inflation has been rising everywhere in the zone. Belgium, the Netherlands, Greece and Ireland show the most uptrend to inflation. For the rest of the zone members inflation moved up from its cycle lows and has been mostly moving sideways since then with some having small positive gradients and others showing small negative gradients.

Flexible rates will do their thing: FLEX
What we see is a very non-convergent set of macro policy situations that have the wherewithal to create a lot of international tensions. Europe is growing faster than the US and has adopted austerity to cap its growth and limit the spin-off of positive stimulus for the rest of the world. The austerity does seem to be slowing it down so maybe these price trends will be cut short of continuing their uptrend where those uptrend exist. In the US the economy's recovery started out OK but has since remained sluggish and the Fed now seems more worried than what its forecasts reveal about its formal expectations of the future. The Fed is in the process of adopting a very controversial 'stimulus program' that seems to put job growth first and prices second (let's not say that 'price stability' is second since the Fed professes a concern that inflation is trending down and is already close to being too low). Japan is simply stuck in the mud and still spinning its wheels. China, the big new player, wants to go on with business as usual and does not grasp the fact that its size now makes its behavior endogenous; it can no longer expect the special treatment of a 'small' underdeveloped outsider. China must step up and play the trade game by the real rules of the game. It will when it stops pouting.

Worries without reason?
In the US, inflation remains at bay – but more importantly so does deflation. There is no hint in the day's PPI that inflation is moving even lower. But the Fed remains worried and the worries in Europe are of a different sort. Therein lies the tension. To each region, its own policy and that is what a flexible exchange rate system allows and demands, but there still are consequences. These will continue to play out. For now at least the die seems to be cast. Europe is engaged in austerity and in regaining fiscal discipline; the US is trying for monetary stimulus. China is unhappy. Japan is unhappy. There are the trappings for trade wars and there is name-calling over competitive depreciations. Ok there are plenty of reasons to worry but maybe more reason to worry about what policy is doing than what it is fighting.

Euro-Area & Friends: Headline Inflation Yr/Yr And Trends
  Year/year Mo/Mo 3Mo: AR 6Mo:Ar
Total HICP Sep-10 Jul-10 Sep-10 Aug-10 Sep-10 Sep-10
Belgium 2.9% 2.5% 0.6% 0.6% 2.9% 2.0%
Finland 1.5% 1.3% 0.3% 0.4% 2.9% 1.8%
France 1.8% 1.9% 0.2% 0.0% 1.6% 0.6%
Germany 1.3% 1.2% 0.2% 0.2% 1.9% 0.6%
Greece 5.7% 5.5% 0.2% 0.5% 5.2% 5.8%
Ireland -1.0% -1.2% -0.1% -0.1% 1.1% -0.2%
Italy 1.6% 1.8% 0.1% 0.5% 1.8% 1.6%
Luxembourg 2.6% 2.9% 0.2% 0.3% 4.8% 1.3%
The Netherlands 1.4% 1.3% 0.3% 0.0% 2.0% 0.8%
Spain 2.1% 1.9% 0.1% 0.4% 3.9% 2.0%
EU & Other Total HICP/CPI
UK(HICP) 3.1% 3.1% 0.2% 0.3% 2.1% 1.9%
large image