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Economy in Brief

German PPI Runs Wild But May Not Translate Into Substantial CPI Changes
by Robert Brusca  March 20, 2017

The German PPI rose in February. It gained 0.3% in February relative to January, pushing the year-on-year gauge up to a 3.0% gain as the sequential readings rose to a 4.6% pace over six months and a 6.1% annualized pace over three months.

The German PPI excluding energy was also up by 0.3% month-to-month in February. It is up by 2.2% over 12 months with a pace of 3.7% annualized over six months and to an annualized gain at 4.7% over three months. Both the headline and ex-energy PPIs are soaring in February. With oil up at a 50% annual rate in Q1, the PPI headline is up at a 6.5% annualized rate in Q1and the ex-energy PPI is up at a 4.8% pace.

However, the driving force for price increases is really slowing down. Brent oil, which rose at a 99.3% annualized rate over three months, made most of that gain with a 16.5% rise in December. In January the Brent prices rose by only 0.9% and in February Brent gained 1.0%. More recently spot oil prices have been not just slowing but dropping- backtracking. Brent prices were down to $51 and change per barrel this morning as WTI oil prices were near $48/barrel. If oil levels off here or back tracks, much of what has looked like inflation, but has in reality been a relative price resetting, will go away leaving inflation low once again.

The chart and the table show the tracking of the more important CPI data with the PPI. PPI strength often barely budges the CPI. In this case, they are both being moved by energy prices. The core and headline German CPI each are up by 0.2% in February. The CPI headline is up by an 'excessive' 2.3% over 12 months; its pace is a stronger 2.6% over six months and a stronger still 3.4% over three months. The ex-energy German CPI is not excessive up, having risen by only 1.7% over 12 months, accelerating to 2% over six months and then 'gone rogue' at a 2.2% pace over three months. The inflation rate that ECB policy looks at is hardly out of control and the German contribution recently has generally been at a pace greater than that for the rest of the EMU. On balance, policy hardly seems to be pressured and that will be truer if oil price softening continues. The core shows that there is not really not much momentum outside of oil. In the quarter-to-date, the CPI headline is up at a 2.8% annual rate and the ex-energy PPI is up at a 2.1% annual rate.

The inflation story is really not one that is told with reference of the low unemployment rate or high capacity utilization rate or according to the value of the euro but according to the level of oil prices. All nations are experiencing some sort of an oil price gain and that is working its way through the various stages of production as well as economic sectors. Since oil trends are looking dodgy again, the U.S. rig count continues to rise and Libya, a country excluded from OPEC's output-cut deal, may be ramping up oil output, we could be poised to see more even downward pressure on oil.

This whole central bank move and push to normalize policy has a lot to do with how oil prices dressed up the inflation data, legitimizing rate moves. If oil has to undress, we may find that the inflation data are much less exciting. Of course, some of the increases in economic activity have come from the oil patch as well. At a time when overall investment has been weak because capacity is still not strained, a loss of oil sector momentum on the back of weakening oil prices could have a far-reaching impact on economic data not just on inflation. This is will be something to watch.

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