German Export Prices Remain Weak

German export prices remain weak over current months as well as over 12 months. German import prices show some lift in November and over three months, but they are lower on balance over 12 months. Export and import prices excluding petroleum show much the same patterns.

Domestic price measures, including the closely watched CPI and CPI excluding energy prices, show ongoing weakness over three months, six months, and 12 months. Producer prices are weaker than consumer prices. All prices (except the CPI ex-energy) show weaker results over the last 12 months than over the previous 12 months. A lot of that probably has to do with oil prices that rose over the previous 12 months but have been lower on balance over the last 12 months.

The ECB makes policy off of EMU-wide price trends, not over German trends. But Germany does carry a large weight in the European scheme of policymaking. And right now German prices and price trends are making little progress toward a normalization of inflation. Germans and other policy hawks in Europe have been looking to normalize the ECBs interest rates for some time. They do not seem to share the Federal Reserve’s notion of a model featuring R-Star (the concept of a cyclically shifting neutral rate of interest). Instead, regardless of how things may have shifted in the real economy inflation hawks in Europe are anxious to rid themselves of negative rates and to get rates up to a ‘more normal’ level. The Fed in the U.S. has already ‘been there/done that’ and it did not work out so well for the Fed because it misjudged (or ignored) R-Star and had to rapidly backtrack from its rate hikes just as it had nearly reached what it thought was its destination.

At this point, we can only speculate what that may mean for Europe. There is a new ECB head who has promised them she would review the impact of negative rates and reassess their effectiveness. Sweden has just jumped off the negative rate bandwagon. The ECB has a good change of jettisoning its own negative rates early in 2020. However, that does not make the move risk-free, nor does it make the policy-hawks right.

Everyone is focused on the impact of the phase-one U.S.-China trade deal. Yet, that was only the easy part of a trade deal with miles left to go before the full deal is done. The Trump team has been careful not to give China too much for cutting the phase-one deal because it wants pressure and leverage to conclude the more important phase-two or final deal. So the benefits to global trade from phase-one should be limited – look at all the tariffs that have been left in place. What may be more at risk - as we saw in the U.S.- is a central bank that is more committed to getting interest rates back up that it ought to be. Has the ECB fallen into its own version of the same trap that the Federal Reserve in the U.S. fell into in December of last year? I think that will bear watching.

While economists argue that oil prices are not really inflationary (they just shift relative prices), it is clear that in the short-run the targeted headline prices do move with oil prices. And while central banks can shift their gaze to a measure free of energy prices, this is done judgmentally when (and if) it is done at all. Central bank official targets continue to be expressed in terms of headline prices. And that may pose an additional challenge to monetary policy to get it right.

The table below produces a correlation matrix. The table shows that among the selected price indexes only the German CPI has no strong correlation (a correlation at or above 0.80) with any other component. It’s correlation with Brent oil is 0.61 and with total import prices is 0.46. It has its highest correlations at 0.77 with the overall CPI (or course) and at 0.64 with the PPI. The core correlations tell us that it is not being driven by oil prices. German ex-energy CPI prices are up by 1.5% over 12 months but are softer over three months even as Brent oil prices are rising strongly. In contrast, the headline CPI has a strong correlation with total import prices, with import prices excluding petrol, and with the PPI and the PPI excluding petrol. The correlation with Brent is high but falls just out of the range that is construed as ‘a strong correlation’ in the table.

The table shows that Brent has its highest correlations with the PPI and with import prices.

German export prices excluding petrol have a high correlation only with total export prices.

Import prices show high correlations with the largest number of fellow prices in the table that include all items except the CPI excluding energy and export prices excluding petrol.

The German CPI excluding energy and export prices excluding petrol are the most isolated prices in the table. The CPI gauge is showing some pressure year-on-year, but that is fading a bit over three months. The export price gauge is showing price weakness across the board but especially over 12 months. German export prices may be weak because Germany is forced into an export model that weighs events in foreign markets a great deal in setting prices. If so, weak export prices are a sign of weakness in German export markets. Or it may be that export contracts tend to be long since German capital goods exports are quite important. When that is the case, the export item maybe exported only after a great deal of time has lapsed causing the item’s prices to bear little resemblance to the prices under current conditions.

Whatever the reasons, we see here ongoing weakness in German price trends. The strength in Brent prices will only flow to Germany through certain channels. Meanwhile, German export prices seem to tell a story of still weak German export markets. But monetary trends are shifting as we saw the Fed switch from tightening to a three rate-cut regime and we have just seen Sweden flip the switch to off on negative rates. Of course, different countries and regions have their own experiences, but they can learn from each other. It will be interesting to see what German monetary policy has learned as 2020 progresses. Will the hawks be right and win their case with Ms. Lagarde? Or will they overstep their bounds and wind up prolonging the economic weakness in Europe by getting rates too-high too-soon?

German price trends and their causes...