EMU Inflation: Is It Easing or Is It in a Jagged Uptrend?

The chart makes the point best on the problem of how to interpret the trends for inflation in the largest EMU nations. Going back to 2014 or 2016, we find inflation has been rising across all the countries in the chart. From about 2017, the estimated trends for the moves in the HICPs would be more or less flat with a very poor fit. If we measure from mid-2018 to date, inflation is moving lower.

Note that that is reflected in headline rates as well as the cores (or ex-energy measures) in the table. Core and headline rates show less lift over 12 months than over the previous 12 months albeit their changes are small and all the core rates of inflation are below 2% over 12 months as well over the previous 12 months.

Inflation is accelerating!

The top table shows some year-on-year trends and also focuses on the within one-year trends from 12-months to six-months to three-months. These sequential rates show acceleration on all measures across all countries except for headline inflation in Italy and Spain and an elusive trend for Italian core inflation.

Year-on-year trends measured back from four years ago show acceleration in train until the current year as a general condition. France shows some wavering in this trend for both the headline and core with some variation in acceleration coming earlier in the time series. For Italy asserting there is a trend there somewhere for core inflation is taking hair-splitting to a new extreme. In Italy where the economy continues to struggle, we see core inflation less than 1% on all horizons! In the U.K., core inflation has decelerated for two years in a row; the same is true of Spain. On this timeline, Spain has only one year of core inflation above the 1% mark.

Taking a broader view (Table 1), we see that the five-year pace for headline inflation has been 1.2% at the highest among this group (Germany). Italy has the lowest pace at 0.7% (tied with Spain). For core or ex-energy inflation, again, Germany has the highest 5-year (5-YTD) pace at 1.3% with Italy the lowest at 0.6%.

Inflation accelerates then decelerates

I think there are several takeaways from these trends and results.
• First, inflation is and has been low- well below targeted levels for both core and headline measures.
• Second, while there are differences among members, the predominate feature is that inflation trends seem to roll though all of these nations with roughly the same timing and much the same impact. That is important from the standpoint of ECB policymaking.
• Third, from separate analysis, we find the inflation differences among the original EMU members are now down near all-time lows.
• Fourth, the core inflation rates give us some (vague) sense that Keynesianism still matters. Germany is the hottest economy in this group and has the highest inflation; Italy is the weakest, still not back to its prerecession level of real GDP, and it has the weakest inflation.

Inflation is a complicated concept. It is more complicated in the EMU where country level statistics are kept in separate boxes and provide us with many different measures for even adjacent contiguous economic areas using the same currency. In the U.S., there are separate state-wide inflation metrics, but they are rarely ever part of the U.S. inflation analysis. Understanding inflation is complicated beyond what weights to use in Europe or whether one should look at the headline or the core. The main complication –as always- is about how to treat new pressures when they arise. The point of using a core rate or a trimmed mean or median rate or an ex-energy rate is to try to get at that part of an inflation measure that is robust and will be ongoing. This is a terrifically difficult thing to do. We provide inflation calculated year-on-year over six months and over three months as an aid to try to see where inflation is going. But these horizons, while good at showing the direction and intensity of current pressures, often are not that helpful to ferreting out the lasting trend. That difficulty remains one of the key problems in understanding inflation. Despite that issue, it is clear that inflation in Europe for now is low and for some considerable time has been too low.