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Economy in Brief

Euro-Area Inflation Trends not yet Corralled
by Robert Brusca  July 14, 2011

Euro-Area inflation was still irregular in June. Among the large countries Italy had the largest monthly rise at 0.2% and Spain showed the largest drop at -0.3%. But the good news is that headline inflation is decelerating across these countries on abroad front. Italy has the stickiest inflation with the smallest drop in its 3-month rate compared to its 12-month pace and it is showing at drop in the rate of 0.5%.

Core inflation measurement is not quite as up to date as for the headline; it is still lagging the headline by one month. Core inflation is accelerating in each country except the UK where the core pace has moved sharply lower in the last three-months.

But to the extent that the core (ex food and energy HICP) inflation rates reflect trend, the trend in EMU inflation is too high. At 2.3% even Germany is above the 2% ceiling rate that the ECB targets. At 6.5% and 5.9%, respectively, Spain and Italy are way over the top. Yet it is in Spain where headline inflation is falling the fastest at -2.1% over three months compared to 3.1% Yr/Yr, a deceleration in the rate of 5.2 percentage points.

Unfortunately the core rate of inflation is not just high but is also accelerating. The deceleration in Headline inflation, however and the slower growth in the Zone should help to restore balance in the core rate. While the core ostensibly is not central to policymaking in at the ECB there is no denying that the core rate is important since it describes inflation momentum in the bulk of commodities and services in the zone. This metric is still on thin ice and it goes a long way in explaining why the ECB is hiking rates even with such debt problems and with growth so weak in so many member nations.

Trends in EMU HICP
  % Mo/Mo % SAAR
  Jun-11 May-11 Apr-11 3Mo 6Mo 12Mo Yr Ago
HICP
Germany -0.1% -0.2% 0.3% 0.0% 1.8% 2.4% 0.8%
France 0.1% 0.0% 0.2% 0.9% 2.0% 2.3% 1.7%
Italy 0.2% 0.2% 0.3% 2.5% 3.2% 3.0% 1.5%
UK -0.1% 0.0% 0.8% 2.7% 4.2% 4.2% 3.3%
Spain -0.3% -0.1% -0.1% -2.1% 3.2% 3.1% 2.1%
Core:xFE&A
Germany #N/A -0.1% 0.5% 2.3% 1.7% 1.4% 0.6%
France #N/A 0.1% 0.3% 2.8% 1.7% 1.4% 0.8%
Italy #N/A -0.1% 0.5% 5.9% 2.7% 2.2% 1.5%
UK #N/A -0.1% 0.8% 2.8% 4.1% 3.5% 2.8%
Spain #N/A 0.1% -0.5% 6.5% 2.9% 2.0% 0.9%
Grey shaded area data trail by one month
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