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Economy in Brief

German Inflation Is Still Rising
by Robert Brusca  August 10, 2011

The German headline inflation rate has more or less paused near its recent Yr/Yr peak pace. Core inflation (ex-seasonal food and energy ) is still pushing higher. The headline HICP rose by 0.3% this month. The core reading (available in July for the domestic German CPI) edged higher by 0.1% in July. Core inflation is now up by 1.6% over 12-months compared to a rise of 2.6% for the HICP headline (2.5% domestic measure). The ECB seeks to limit overall EMU inflation at 2%. Germany tends to be the low inflation country in EMU so the ECB is still fighting off an inflation problem. Even so the European economies are slowing and Germany’s core rate is still below the 2% ceiling, a sign that inflation is not as widespread as the increase in the overall price level. The overall rate can be buffeted short term by erratic factors that are not the same as inflation such as relative price shifts in oil and in food and the impact fluctuations of the exchange rate on import prices.

Germany’s overall inflation rate (domestic version) is down to 1.5% over three months compared to 2.4% over six months and 2.5% over 12 months. The diffusion data tell us that the 12-month inflation rate reflects widespread inflation acceleration across categories; that means that the pace of price increases is higher than it was one year ago for most CPI categories. This is because one year ago the domestic CPI was falling at a 0.4% pace. So, yes, inflation has accelerated sharply but on the other hand, the overall pace is hardly a galloping pace. The price level has stopped falling.

The diffusion statistic for 12-mo inflation Vs one year ago is 0.90. That means the pace of price increases is higher in 90% of the CPI categories. But over six months the inflation pace is down to 2.4% from 2.5% and the diffusion reading is 0.455. That means inflation is rising faster for six months compared to 12-month in only 45.5% of the categories. Clearly inflation accelerated from a depressed pace of -0.4% it is now hovering at a pace that keeps prices rising at a steady pace in many categories. Over three-months inflation has slipped in the domestic CPI to measure to 1.5% down from a 2.4% pace over six months. Yet diffusion is still at 0.455. This suggests that the underlying inflation dynamics are not changing all that much. Perhaps one or two high-weighed categories saw inflation turn lower over three-months but the general thrust of inflation momentum is still about the same.

On balance this suggests that the downshift in Core German inflation either is not yet a real phenomenon or has not gone on long enough to have a pronounced impact across categories. The downshift in price pressures is only affecting a few categories.

Inflation trends remain important to watch since the ECB is in the middle of a real policy split buying bonds of the most troubled EMU core countries trying to stave off a crisis. In this environment it will want to make sure it does not lose its grip on inflation control. The ECB must contain the bad news even though weakness in the Zone makes a continuing inflation overshoot less likely.

German HICP and CPI details
  Mo/Mo % SAAR % Yr/Yr
  Jul-11 Jun-11 May-11 3Mo 6Mo 12Mo Yr Ago
HICP Total 0.3% -0.1% -0.2% 0.0% 2.2% 2.6% 1.2%
All 0.3% 0.0% 0.1% 1.5% 2.4% 2.5% 1.1%
CPIxF&E 0.1% 0.2% 0.1% 1.5% 1.9% 1.6% 0.6%
Food 0.3% -0.1% 1.0% 4.6% 3.9% 2.7% 2.1%
Alcohol 0.1% 0.5% 0.8% 5.8% 3.0% 1.9% 0.4%
Clothing & Shoes 0.4% -0.7% 1.1% 3.1% 1.9% 1.9% 1.3%
Rent &Util 0.4% 0.1% -0.1% 1.4% 2.9% 3.3% 1.3%
Health Care -0.1% 0.0% 0.0% -0.4% 0.4% 0.8% 0.4%
Transport 0.8% -0.7% -0.3% -1.0% 2.3% 4.9% 3.4%
Communication -0.6% 0.0% 0.0% -2.3% -2.8% -3.1% -1.7%
Rec &Culture -0.6% 1.6% -1.4% -1.5% 0.8% 1.1% -0.3%
Education 0.1% -0.1% 0.0% 0.0% -1.5% 1.8% -1.2%
Restaurant & Hotel 0.5% 0.2% -0.3% 1.8% 2.0% 1.5% 1.1%
Other 0.0% 0.1% 0.0% 0.4% 3.3% 2.1% 0.8%
Diffusion   45.5% 45.5% 90.9% --
Type: Diffusion: Current Compared to 6Mo 12Mo Yr-Ago --
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