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Economy in Brief

German Inflation Continues to Run Hot Despite Monthly Cooling
by Robert Brusca  May 11, 2022

German inflation measured by the HICP headline rose by 0.3% in April, a sharp deceleration from a 2.1% rise in March. However, the year-on-year rate went up to 7.8% in April. That marks an acceleration from 7.6% in March. The core German rate continued to rise by 0.5% in April, the same rate as in March and its year-on-year pace sits at 4.1%, up from 3.7% in March.

Record-setting inflation in Germany
The German domestic CPI rose by 0.3%, also down sharply from its rise of 2.4% in March. The CPI ex-energy in the domestic index rose 0.8% in April. up from its 0.6% gain in March. The CPI ex-energy is up by 4.2% year-over-year as the headline domestic CPI measure rose by 7.4%; the headline gain is the strongest gain since German reunification. That’s not exactly a ‘red-letter’ day for Germany and the Bundesbank.

With monetary policy still not engaged
German inflation remains extremely high, well beyond any tolerances that the Bundesbank would have set for inflation. German HICP core inflation has been above 2% consistently and rising faster since July 2021. German headline inflation has been above 2% since April 2021. For over a year German inflation has been above the Bundesbank metric of the inflation target it used to enforce with vigilance. During this period, the ECB has taken no steps to harness inflation in the euro area. Monetary policy is firmly in control of the ECB – or out of control by the ECB – in the euro area. The ECB is signaling it may finally hike rates in July and end its bond buying stimulus early in the thread quarter.

Inflation’s breadth monthly
In April, inflation diffusion registered only 18.2% with inflation diffusion at less than 20%. These are very low, in fact, disinflationary readings! (The diffusion metric is half of the unchanged inflation rates across categories on a set timeline plus all the increases in inflation with that sum as a percentage of the total number of categories. Rising diffusion means rising inflation pressure. A diffusion metric below 50% indicates inflation falling in more categories than it is rising- hence the reference to disinflation at values below 50%.) In March diffusion had been 36.4% and in February diffusion had been at zero as no categories showed inflation accelerating in February 2022. But don’t get your hopes up on monthly data…

Sequential inflation pressures are broad
Viewing diffusion over three months, six months and 12 months, the results are much different. Over three months inflation diffusion is at 68.2%, inflation diffusion is a touch lower at 63.6% over six months; it is much higher at 81.8% comparing 12-month inflation to 12-months ago. These metrics show clearly rising inflation forces.

Sequential inflation rates in Germany find the HICP rising from a 7.8% pace over 12 months to a 10.8% pace over six months to 12.2% over three months. The domestic measure mirrors these same statistics, rising by 7.4% over 12 months, a 10.6% rate over six months and at a 13.4% pace over three months.

The HICP core rate moves from 4.1% over 12 months, up to a 4.6% pace over six months then back down to a 3.3% pace over three months. However, the German domestic CPI excluding energy logs a 4.2% rise over 12 months, accelerates to a 5.5% pace over six months then accelerates further to a 6.3% pace over three months.

German sequential inflation continues to be sticky and high despite some slack in monthly data. Inflation is continuing to accelerate rather broadly sequentially despite less breadth monthly. Monthly data can be quite volatile and may not be harbingers.

Brent oil trends
Of course, one of the main factors driving inflation has been oil prices. Brent oil over 12 months is up by 80%, over six months it's up at an 84.6% annual rate, over three months it's rising at a 184.3% annual rate. Oil would seem to be laying a foundation for worsening inflation numbers ahead. On monthly data, there is a break in oil with prices falling by 3.8% in April but after sold gains in each of the three previous months. Given the ‘games’ that are being played with gas and the gas pipeline supplies, oil prices do not seem likely candidates for good news on inflation any time soon.

Inflation is global…but fighting it is still local
The U.S. also reported out inflation statistics today and the U.S. CPI showed a small break lower in its year-over-year pace, but the emphasis here is on ‘a small break’ lower. Inflation forces globally are still strong and while there is a great deal of attention on whether inflation has peaked or not there continue to be inflation forces stirring in the background beyond the pressures that may have been put in play by reactions to the pandemic.

This is not like a wagon that was pushed once in the pandemic and will lose momentum gradually due to friction. There are ongoing supply chain issues as firms reorient their supply chains for a post pandemic environment. It's hard to tell how long it will take for those to be reset. Beyond that, there are new pressures and new inflation forces that are arising and will continue to arise from the Russian Ukraine war.

Just today Ukraine began to accuse Russia of stealing its grain. The redirection of grain exports away from traditional customers could be a new source of inflation impulses globally. The reduction of fertilizer exports from Russia is already a factor and something that will affect crop yields in the future and crop prices in the future- more unwelcome news ahead.

It's hard to tell all the ways in which conflicts between Ukraine and Russia and how economic sanctions are going to continue to affect global prices and global supply chains. But the simple idea that inflation has peaked and will continue to fall may be an oversimplified view of how the inflation process is going to work. Central banks are raising rates or preparing to raise rates and to reduce other forms of monetary stimulus. Still, the actions by central banks typically take a long time to bite and looking for the inflation worm to turn decisively so quickly maybe expecting too much too soon.

Commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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