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Economy in Brief

German Inflation Stops Accelerating
by Robert Brusca  March 11, 2022

German inflation rose by 0.4% in February after rising by 1.5% in January. The core rate fell by 0.3% in February after rising by 0.6% in January. Sequential growth rates show that the HICP measure of inflation for Germany rose at a 5.5% annual rate over 12 months, accelerated to a 7.8% rate over six months but cooled its pace to 7.4% over three months. Similarly, core inflation rose by 3.1% over 12 months, at a 4.1% annual rate over six months, then fell back to a 1.8% pace over three months. The bad news, of course, is that inflation in Germany remains exceptionally high; 5.5% is an extremely high headline inflation rate. The core pace of 3.1% is well above the 2% goal for inflation for the entire of the EMU area set by the European Central Bank. However, inflation in Germany is decelerating! It decelerated from six-months to three-months for the headline; for the core the deceleration is substantial and significant.

...and the details are devilishly good
In addition to deceleration in the HICP, diffusion calculations show that the increases for inflation by category are actually not prevalent. However, over 12 months inflation is high, virulent, and broad-based. The 12-month inflation rate, which is at a 5.5% pace for the HICP headline, is 5.2% for the German domestic CPI. It registers a 72.7% diffusion reading. That's an extremely high reading, but that's for the year-over-year pace compared to the pace of one-year ago.

If we look at a six-month horizon, inflation rate accelerates to 7.8% from 5.5% in the HICP while the domestic gauge accelerates to 6.7% from 5.2% inflation. But over six months diffusion drops to 36.4%. This is significant. Below 50% diffusion is telling us that inflation is not very widespread. In fact, it's telling us that falling inflation is a more common characteristic than rising inflation. At 36.4%, diffusion for German inflation has already cooled broadly compared to 12-months despite the increase in the headline rate. Of course, what that means is that inflation is being carried ahead by just a few categories pushing the headline up aggressively even though that kind of inflation experience does not line up across most categories.

The three-month HICP headline shows deceleration to a 7.4% pace from 7.8%. For the German domestic inflation rate, however, there is an acceleration to a 7.4% pace from a 6.7% pace. The domestic CPI excluding energy accelerates to 3.7% from 3.5%. The domestic ex-energy acceleration is a small one, but it's different from the HICP core which showed a significant decline to a pace of 1.8%. However, when we look at the details of diffusion, we find once again that the diffusion for inflation over three months compared to six months there's only a 36.4% diffusion marker. Inflation does not accelerate broadly over three months compared to six months either.

The behavior of inflation overall depends in some sense which of these gauges you want to look at. Over three months, it's decelerating for headline inflation and accelerating for the domestic measurement; it's decelerating for core HICP or it's accelerating for the CPI excluding energy. So, what you see for German inflation depends a lot on the actual metric you want to use to measure it. However, if you look down the line at various components of the CPI report, you find that inflation is not accelerating very many places. And in most places, there is a decelerating pace over three months and over six months. That is an important consistency.

Oil
It's also interesting that this is happening in Germany as Brent oil prices continue to push higher. In February Brent was 9.6% higher than in January; January was 14% higher than in December; the December Brent price did back off by 6.3%. If we look at the sequential growth rates, over 12 months Brent is up at a 61% annual rate, over six months it's up at a 91.5% annual rate, and over three months it's up at an 88.1% annual rate. Yet, the inflation metrics do not show that inflation is permeating the German economy.

Inflation is having varied effects in the headlines depending on which measure we look at but if looking up and down the line, inflation is not causing line-item inflation to increase across the board in Germany. At this point, I count this as good news. However, we still don't know if the bulk of the German economy is going to continue to be this resistant to the forces of inflation or if energy prices continue to push higher because there are other factors at work, too.

There is war in Ukraine that presses on and continues to create dislocations and problems with all sorts of displaced people, a number that has already gone up to 2.5 million and there's no sense that this situation in Ukraine is over or anywhere near over. Global supply chain conditions continued to be impacted. We've been distracted from the presence of COVID, but COVID still circulates, and we are simply hoping that it's going to fade into the background or not become an issue. But then, we don't know about that. Forecasting while keeping fingers crossed in hazardous.

For now, the trend in general inflation is good news, it's welcome news, but the rate of inflation remains high, and that means the ECB still has plenty of work to do. This past week the ECB made a small step to begin to address its inflation problem, but the ECB still has an awful lot yet to do. Even if inflation is not accelerating in Germany, it is a euro area-wide problem and - acceleration aside - the pace of inflation is well over target, and it shows no sign of behaving on its own.

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