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Economy in Brief

EMU PPI Inflation is Still Sinking

by Robert Brusca  June 4th, 2013

Deflationary forces continued to be strong in the Eurozone in April. The total excluding construction PPI (PPIxC) fell by 0.9% after falling by 0.3% in March. Over three months this PPI metric is falling at a 4.9% annual rate, over six months it's falling at a 2.8% annual rate, and over 12 months it's falling at a 0.2% annual rate. The pace of decline is accelerating.

Turning to components, capital goods prices rose by 0.1% after being flat in March. Inflation for capital goods is fairly well behaved having been around the 0.7% to 0.8% annual-rate mark over the recent three-, six-, and twelve-month horizons.

Consumer goods prices fell by 0.2% in April after rising 0.1% in March; their trend shows some clear deceleration as the 12 month pace of 1.8% drops to 0.8% over six-months and is flat over the recent three-months.

Intermediate goods prices fell by 0.8% in April and by 0.1% in March. Their deflation tendencies are pronounced with energy playing a large role in the sector. Energy obviously is having a big impact on these inflation trends overall but is particularly important for intermediate goods. We know that the ECB emphasizes its HICP measure, the harmonized index of consumer prices, not producer prices. Still, these trends in producer prices show a great deal of weakness and even declines year-over-year for PPIxC for intermediate goods and in fact for manufacturing. That will not go unnoticed.

Look at the manufacturing price trends for Germany and France: for Germany excluding energy we see the same tendency to deceleration with declines in ex-energy prices in both April and in March. In Germany year-over-year prices are up but only by 0.4%. In France, the index for manufacturing prices is flat in April, barely down in March, but is falling over three-months, over six-months, and over 12 months.

Even core ex-energy prices trends will be affected by energy price changes when they are severe or long-lasting and that may be the story in Germany and France and throughout the Eurozone. But we know that overall economic activity is weak; we also know there's a great deal of slack. That is another reason to expect prices to be weak. When demand is weak prices are weak, so price weakness is not just a statement about energy.

The 11 key countries in the table present their inflation metrics for the PPI excluding construction. There are declines for 10 of 11 countries in April, and declines for 10 of 11 countries in May. Over three-months there are declines in 10 of 11 countries; over six-months there are declines for 10 of 11 countries. Over 12-months only five of 11 countries have inflation declining. But the biggest increase in inflation over 12 months is in Ireland at 1.2% and in the UK at 1.1%. Interestingly, Germany is one of the countries that has inflation higher year-over-year, but only by 0.1%. One of the points that that this underscores is that Germany, which is a very inflation conscious country, is one of the stronger economies. Germany's relative inflation performance is reflecting its relatively better growth performance compared to the rest of the Zone.

I don't mean to confuse inflation metrics with growth metrics, but on the other hand we know that they are not unrelated. The Federal Reserve has been much quicker to act against deflation and much more worried about deflation in general than has been the ECB. Japan has finally gotten religion and is fighting its deflation aggressively. We know that we have conditions of excess supply around the world which will tend to hammer prices lower, particularly in this environment where demand continues to be so lethargic.

This remains a very difficult environment for policymaking. The PPI may not be in the center of the ECB's bull's-eye but it's one of those price metrics that will be looked at and when it is looked at its inflation trends are pointing decidedly lower. The inflation rates are decidedly low and growth is exceptionally lethargic. That combination clearly calls for more economic stimulus, but in the e-Zone, a jurisdiction that has been serving up austerity for breakfast, lunch and dinner such an about-face seems unlikely. We have yet to see if there will be any letting up on this austerity kick. Spain in May is reporting a sharp drop in its unemployment condition but that's one month and it has a long way to go. Europe needs more than just a few happenstance bits of good news; it needs a policy that is real and that focuses on its needs.

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