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Economy in Brief

EMU PPI Inflation Is Blistering Hot
by Robert Brusca  June 2, 2022

Producer price inflation in the euro area in April rose by 1.9% month-to-month. Capital goods prices rose 1%, consumer goods prices rose 2.4%, month-to-month, while intermediate goods rose by 3.7%. Month-to-month manufacturing overall prices rose by 2.3%.

PPI inflation in the euro area has been exceptionally high. It reaches 37.2% year-over-year with a six-month annualized rate at 43.3% and a three-month annualized rate at 43.6%. These are tremendous gains and accelerations. If we compare inflation over the last 12 months to what it was one year ago over the previous 12-months, inflation accelerated to a 37.2% pace from 7.6% in April of one year ago.

And what’s more it has done that without the ECB batting an eyelash…

One year ago, inflation was mostly a factor in the intermediate goods sector where inflation rose by 7.1% year-over-year. Consumer goods inflation had risen by 1% over 12 months; capital goods inflation was at 1.5% over 12 months. These are the 12-month increases from April of one year ago and they've accelerated extravagantly since that time.

Across the euro area inflation remains high and various reporting countries (see Table for EMU and EU countries) show year-over-year inflation that ranges from a high of 62.4% in Ireland and in Denmark (Denmark being an EU member) to as low as 22.2% in Sweden (an EU member). Finland, an EMU member, also has a ‘relatively’ low rate for the Monetary Union at 24.9%.

Year-over-year inflation accelerates in all the countries in the table. Over six months, inflation accelerates in 92% of the countries in the table. Over three months, inflation accelerates in 77% of the countries in the table. Inflation has simply been accelerating and continues to do so even from exceptionally high existing levels of inflation.

During this period, the European Central Bank has been in denial and earlier this year Christine Lagarde, the head of the central bank, was saying that it was unlikely the policy would be reacting and raising rates this year. She has had to recant that statement and the ECB is now on a path to begin securities sales and rate hiking sometime between July and September of this year. With PPI inflation at 33% year-over-year in Germany and accelerating to a 46.7% pace over three months, the Germans are clearly apoplectic about inflation pressures. The ECB was supposed to be modeled after the Bundesbank and was given a charter that was supposed to give it similar insulation from political pressure, but it hasn't worked out that way – has it?

One of the things we learn from the ECB structure, comparing it to the Bundesbank is that it's not so much the structure that will give the central bank its mandate as the bank and its purpose having the backing from its members. We see the same thing in the United States where the Federal Reserve has undergone some modification in its policy framework statement. But more important than that has been the shift of the Fed from seeing its dual mandate as controlling inflation all the time and creating full employment in the long run to being muscled by progressives to produce full employment in the short run as well. Frankly, this doesn't work; we've always known that this doesn't work, and right now, this isn't working. But it remains as the Fed’s policy framework.

Central banks have gone from being conservative forces that support monetary discipline to being instruments of the state to pursue essentially fiscal objectives and this is the aspect of central banking that has changed and failed in this new millennium. Central bankers first and foremost need to be central bankers. They need to control inflation and to think about inflation and to let fiscal authorities be concerned about growth and other matters like social justice and climate. There may be times when special strains require the Monetary Authority to swerve slightly from its low inflation goal. But clearly the danger is that such a swerve can become a completely different track and the central bank once diverted can have a hard time getting back on its main track. That is clearly something that has happened to both the ECB and the Federal Reserve. Can they get back on track or are they forever contaminated by these mistakes?

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

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