German PPI Soars Then Pressure Abates?

The German PPI lost some zing in March as it rose by 0.3% after a burning hot January and February with gains of 1.1% and 0.7%, respectively. The sequential growth rates still indicate a charging-up of inflation as 3-mo inflation exceeds 6-mo inflation which exceeds 12-month inflation. Those trends are in train for both the core and the headline inflation rates. And in the first quarter the PPI is up at a 10.3% pace with the core PPI up at a still strong 6.7% pace. This is a lot of pressure.

Of course, by now, we know that the ECB chose to hike interest rates, rather than to 'wait out' the oil price increases. There seems to be some disagreement about how many rate hikes lie ahead for the rest of the year as Trichet has characterized the decision as one to raise the rate once, while other council members have depicted this as the start of an ongoing series of rate increases.

The inflation trends in the PPI are formidable. Even so, in March the pressures have broken off sharply with the headline up by just 0.3% and the core PPI up by a thin 0.1%. It is no surprise that the inflation bubble has been created by food, energy and other commodity prices, driving a wedge between core and headline inflation. And these pressures have continued to roil on world markets affecting Germany as well as a host of countries. The strength of the euro has not seemed to shield Europe from these pressures until maybe March, but that effect, if the low PPI rise is a result of it, has just showed its hand and has not been powerful enough to reverse the strong up-trend.

The ECB sets its inflation limitations on the CPI not PPI. The CPI pressures have been less but still have been beyond those that the ECB was willing to wait out. HICP inflation is too hot and core inflation while considerably more disciplined is still on the rise for consumer prices. The chart shows the profile of ex-energy inflation for the PPI and CPI series. They are related, both trends are rising, but there are also large differences between them.

The PPI usually shows rising inflation before the CPI but the German CPI often cuts its inflation rise short ahead of the still advancing PPI which overshoots. In this instance each price index seems to be cresting more or less together. Of course one month does not assure a turning point. But there are some hopeful trends on German price developments. And while the ECB will look at the whole of the Zone to make up its mind, the performance of prices in Germany seems to be especially important to the ECB's decision.