German Inflation Still On Deceleration Path... Why?

Happy central bankers - The ECB can be happy. The Bundesbank can be happy. Inflation is beating a retreat in the wake of the financial crisis and as we get about one-year into economic rebound. Over three months the HICP is actually falling. It is decelerating from 12-months to 6-months to 3-months. While the 12-month pace of inflation is above the Yr/Yr pace for one year earlier (0.8% Vs 0%) the diffusion index constructed from the main inflation components show a value of 36.4%. A value of 50% would imply inflation is stable across categories, but in Germany inflation is falling in more categories than it is rising and the price level itself is falling over 3-months.

All measures show same 'happy' result - Germany's domestic inflation statistics that provide the details in the table are not quite so tempered but they are still very good. They, are the source of the diffusion readings. In this treatment, inflation is essentially unchanged over six-months and 12-months but it is still lower over 3-months by this measure.

Or do they? Too much Nothin'? While central bankers can bask in the glow of inflation's barely lit embers, the question is this: 'Is there enough heat there to start the fire that the economy needs for growth?' Japan has been the sole country truly fighting deflation. In the US some talk of the risk of deflation has swirled. No one in Europe seriously seems to consider it. But Germany's HICP is falling over three months.

Ya! Price discipline is widespread - In the main 11 price categories German inflation is accelerating in 3-months compared to six months in only four of them: clothing and shoes show prices are up at a 1.6% annual rate over 3-months compared to -0.8% over six months, Heath care prices are flat over 3-months compared to -0.2% over six months. Communications prices are only falling at a 1.4% pace recently compared to a pace of minus 2.5% over six months. The catch-all 'other' category has prices up at a real-inflation sounding 3.8% over 3-months compared to a pace of -0.7% over six months. Over 3-months inflation's diffusion is 36.4%, the same as for its Yr/Yr comparison.

Core inflation reflects German core-values - Core inflation in Germanys domestic measure (the only one currently available) is up to a 0.8% pace and that is an acceleration from the six month pace of 0.4%. Still the overwhelming view is of inflation in Germany so tightly under warps we have to wonder if there is any room for activity to take hold. Over two years German inflation has averaged less than 0.5% per year; core inflation has averaged about three quarters of one percentage point over the last two years.

Role of the euro - During this period the exchange rate has been dropping and only recently has the euro started to recover. However, for the year previous to this the euro had been on a steady March higher and ahs reached a point of extreme overvaluation. That march must have kept cost pressures contained. We may still be seeing legacy effects from the euro's past rise, the financial crisis and then the recession. The euro's drop has come in a period of slack demand its rebound is minor and nascent. Germany has been busy trying to fend off criticism that it depends too much on exports. Hamburg's mayor is in the news calling that nonsense since he says that is how we got to where we are today. I think he misses the point, since that is exactly the nature of the criticism. Of course we do not expect the mayor of Germany's major port city that benefits from this trade to decry German dependence on trade. But neither should we give his replies much merit. Not only is Germany rising on the tide of overseas demand but it is the main proponent of austerity and this with its inflation rate already so tightly under wraps. I doubt there are many economic prescriptions for tightening fiscal policy with your currency starting to rise, inflation falling and under 1% as it is decelerating on a broad front with economic growth weak and being nourished only by demand from abroad in the face of high domestic and global unemployment.

Different stroke for different folks and different views of thee exact same news - I know when you put on different lenses and look at the level of debt or the ratio of debt to GDP and the pledge made under Mass-Trick agreement you get a different story. But you don't have to be a fan of the movie 'Vantage Point' to know that you see different things from different angles (nor do you need to be a world cup football official, for that matter). Germany, it seems, is eschewing the video tape replay as a resource to re-inspect its own policies. Consider the summit a chance for Germany to have seen its policies from another view point.

The German role: role model or rolled up? - I wonder, in ten years time, if anyone will think Angela Merkel was enlightened or to too-absorbed with the prospect of keeping her party in power? It is well-known that within the Euro-Area Germans have a stronger taste for low inflation and for financial discipline than the other euro-members. This is the real source of instability in the Zone. We are seeing it play out now as Germany engages in what has to be viewed as a terrible mix of fiscal/monetary policy for this point in the business cycle because in its view the structural economic circumstances require it. This is, of course, also playing to speculative demands of the market place which has gone from being a market with the loosest of morals to saintly discipline. The upshot of this? Time will tell.

German HICP and CPI details   Mo/Mo % Saar % Yr/Yr   Jun-10 May-10 Apr-10 3Mo 6Mo 12Mo Yr Ago HICP Total -0.1% 0.1% -0.2% -0.7% 0.7% 0.8% 0.0%   Core #N/A 0.4% -0.5% #N/A #N/A #N/A 1.2% CPI All 0.0% -0.1% 0.2% 0.4% 0.9% 0.8% 0.2%   CPIxF&E 0.1% 0.5% -0.4% 0.8% 0.4% 0.7% 1.1% Food 0.0% -0.4% 0.6% 0.7% 4.0% 0.9% -0.9% Alcohol -0.4% -0.1% 0.1% -1.4% 0.4% 0.4% 3.4% Clothing & Shoes -0.1% 0.3% 0.2% 1.6% -0.8% 1.3% 1.5% Rent &Util 0.0% 0.0% 0.5% 1.8% 1.8% 0.9% 0.1% Health Care 0.1% 0.1% -0.2% 0.0% -0.2% 0.3% 1.0% Transport -0.7% -0.7% -0.2% -6.2% -1.1% 2.8% -3.7% Communication -0.1% -0.1% -0.1% -1.4% -2.5% -2.0% -2.0% Rec &Culture 0.4% 1.8% -2.7% -2.3% 0.4% 0.0% 1.8% Education -0.4% -0.8% -1.6% -10.4% -7.1% -1.3% -5.2% Restaurant & Hotel -0.1% 0.4% -1.0% -2.9% 0.2% 1.1% 2.4% Other 0.3% 0.2% 0.5% 3.8% -0.7% 0.9% 1.3% Diffusion   36.4% 27.3% 36.4%   Type: Diffusion: Current Compared to 6-mo 12-mo Yr-Ago --