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Economy in Brief

Euro Area HICP Steadies at 0.4%
by Robert Brusca  September 17, 2014

The overall inflation rate in the European Monetary Union settled in at 0.4% year-over-year in August. That's the same pace as the previous month, but it keeps the downtrend for year-over-year inflation in place.

Core inflation is up by 1% year-over-year and has been stuck at or near the 1% mark for many months. But it also has a downtrend. Like the headline, the core was up by 1.3% year-over-year one year ago.

Looking at sequential growth rates, EMU is showing some progress on getting the inflation rate higher. The headline is up by 0.4% over 12 months; that dips to 0.3% over six months but rises back to 0.8% over three months. In the case of the core rate, its 1% pace over 12 months slips to 0.7% over six months but then jumps back to 1.6% over three months.

Sequential trends are indicative but are not decisive. At least their trends are moving in the right direction.

When we look at the large countries in the euro area, we see that only Germany and France have inflation accelerating over three months compared to six months. Inflation in both France and Germany is also slightly higher over three months than it is over 12 months. But that is where signs of inflation progress stop. Spain and Italy have inflation rates deteriorating from six months to three months and they post outright declines in consumer prices over three months. Italy's decline is at a 0.7% annual rate. Spain's decline is at a 0.3% annual rate.

If the European Central Bank is looking for evidence that its policies are working to stabilize inflation, there is little significant contrary evidence. But this report does not offer much solace either.

The CPI report from the U.S. isn't helpful to the ECB either. There, inflation unexpectedly fell with the consumer price index for August making an outright decline. U.S. core inflation was flat in August.

The world environment continues to be somewhat hostile to growth. In Ukraine, troops are being cautioned to stand alert even though there's still a ceasefire in place. Ukraine does not trust Russia. Russia has jailed another one of its billionaires. U.S. airstrikes in the Iraq/Syria area continue with a U.S. general saying that troops on the ground can't be ruled out and the President saying that the U.S. will not send combat troops. China, overnight, infused its five largest banks with funds in an unexpected operation that has some wondering about the health of these institutions.

Clearly, the geopolitical situation is not stabilized. There're continuing weak inflation and growth trends globally that are not reassuring. For those looking for growth pick up, the only good news about such low inflation is that these weak inflation rates will turn what appeared to be small nominal changes in retail sales into stronger real numbers.

With these weak inflation reports for the U.S. today and finalized for the EMU, it's hard to see how either area's central bank could be content the results. In the U.K., the monetary policy committee is already split on the course of interest rates. The U.S. does not have members clamoring for rate hikes yet, but there is a substantial division at the Fed about what policy should be and what its guidance ought to say/not to say. The ECB is still trying to find ways to bring more stimulus without violating its charter. This remains very difficult economic environment.

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