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Economy in Brief

German PPI Registers Sharp Gain
by Robert Brusca  April 20, 2021

Germany's PPI surged in March gaining 0.9% after strong gains in each of the two prior months as well. While the gains are somewhat less ‘impressive,' the ex-energy price increases in the last three months have been large as well. Over three months, the German PPI headline is rising at an 11.5% annual rate, excessive by any metric. The PPI excluding energy is up at an 8.2% annualized rate on that span. However, the PPI had previously been listless and over 12 months it is gaining at a 3.8% pace compared to the ex-energy PPI that, even with the last three-month sharp gains, is up by just 2.4% over 12 months.

The chart shows the recent history of the German PPI ex energy vs. the German CPI ex energy. The two price measures, although descriptively similar, have a mutual correlation of under 5%. The ex-energy PPI is about five times more variable than the ex-energy CPI. That means that it is going to emit quite a few signals on inflation moving up or down away from trend that ultimately prove to be false.

The European Central Bank does not target the PPI nor did Germany's Bundesbank before it (...thinking here of ‘German' monetary policy). Of course, Germany is now served by the ECB and the monetary policy is run not for Germany alone but for the EMU area in total. But the ways of looking at policy are more or less the same but with a broader EMU rather than a German focus. Germany continues to be the largest economy in the EMU and its data are bellwethers for policy.

The correlations between the PPI and the CPI both on an ex-energy basis show a weak correlation over a one-year period and a negative correlation over two and three years.

Interestingly, the correlation between inflation and Brent oil prices is higher for the CPI headline than for the PPI headline. And we are in a period in which oil prices are experiencing a lot of upward pressure.

Brent oil prices are up by 185.9% at an annual rate over three months. Over 12 months, Brent prices are up by 91.5%.

In the first quarter, pressure from Brent continues to be intense. Brent oil prices in Q1 over their average level in Q4 are still charging hard, rising at a 228% annual rate. In Q1 the PPI headline is up at a 10.3% annualized rate over Q4 2020. The PPI excluding energy is up a 6.2% annual rate. The German CPI is up at a 7.4% annual rate while the ex-energy CPI is up at a 4.8% annual rate.

Clearly inflation pressures have risen. But are they just recouping past weakness or are they in the process of accelerating further? The debate on policy swirls around these interpretations. Clearly globally economies are still under assault by the virus. Europe is for the moment more exposed than the U.S. But neither place has achieved or is close to achieving what it is believed it will take to have community (or herd) immunity in place. However, the existence of rising inflation has put financial markets on watch for a more virulent inflation and excessive growth even as the virus slows the various economies in real time. Meanwhile, the rise of interest rates in the U.S. has an impact globally as well as in the U.S.

For the time-being, the inflation that has rising and its circulating is easy to ignore especially given economic circumstances and the situation with the virus. But if these pressures persist, policy itself could be forced to take a course of action that so far has been placed off limits. For now the inflation pressure is mostly present in the PPI, an index that is either used as an early warning signal or dismissed as too volatile to be trusted, depending on the analyst. In this environment, few are crying ‘wolf' over the PPI. But if the inflation ‘infection' broadens, that will change too.

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