PPI Trends in Europe's Early Reporters

Oil has been driving trends in the PPI for some time now (see the chart on the left). Since at least 2006, every single major shift in the PPI growth rate has been preceded by a substantial change in the Brent oil price. The recent 'failed attempt' to raise and stabilize oil prices shows up clearly as a PPI and Brent overshoot in which the EMU-wide PPI goes from declining by more than 2% to rising year-over-year by nearly 5% before losing momentum.

PPI trends
The chart on the right shows early PPI reporters Germany, Spain and Portugal with April PPI values in place and with Spain's PPI gain reversing the most followed by Portugal. Germany's pace is still creeping higher as German prices generally underreact when there are large swings. German prices fell the least among this group in 2016 and now German prices are lagging on the upside. However, even as we entertain the message in these charts, we know that OPEC members (today it is Kuwait) are talking about cutting back output even further to get the desired upward move in oil prices to the mid-fifty dollar (per barrel) level or to the somewhat better price levels that OPEC seeks.

Technology as the enemy?
Technology may have become OPEC's worst enemy as high prices have unlocked a wave of investment in the oil patch. New techniques now exist that are being refined to work at ever lower price points to generate supply from formerly uneconomic sources. This development will further impede OPEC's ability to control and lift prices down the road. Currently, OPEC is looking for a high enough sweet spot for the oil price that it can enjoy more revenue without unlocking a flood of supply from alternate sources. It's a difficult game to play and to win. And while all oil producers will benefit if OPEC can pull it off, only OPEC and 'friends' are paying the price to make it happen.

The PPI is not the CPI
PPI inflation has ratcheted up, but with unclear implications for consumer level prices (HICP in Europe; PCE prices in the U.S.). The PPI has always been more volatile than the CPI and many PPI pushes do not have much impact on consumer prices at all. So don't confuse the inflation rates in the PPI with central banks' inflation targets or the prospects for reaching those targets.

Broken trends
Still, as the table shows PPI trends have spread and then have slacked off a bit. All three-month growth rates for producer or wholesale prices in the table are rising at a slower pace over three months than over six months and all (annualized) three-month gains/changes are less than the pace of the 12-month gains. Clearly, the backing down of oil prices has slowed the inflation process in the PPI and should similarly slow whatever knock on effect connects the PPI to the CPI.

Policy
Moving on to policy, there are still great concerns by some of the more hawkish euro states on what policy should do. Several euro-indicators such as the most recent Markit services sector and manufacturing sector indexes have been quite strong, logging six-year highs. And while that is impressive, the last six years largely have not been so impressive. And while some of the more traditional economic statistics I like to call 'accounting reports' (because they add up dollar amounts for retail sales or unit sales as in car sales) are firmer, none of those is looking truly strong yet. On the financial side, money and credit growth is still somewhat feeble. And the ECB's target gauge HICP inflation continues to fail to impress ECB head Mario Draghi as it lacks any significant inflation pressure in the core.

Got inflation?
Japan is still trying to conjure inflation and growth. In the U.S., growth is still uneven, but clearly positive with a hint of acceleration for Q2. But U.S. inflation is still tempered and largely acting the way inflation is in Europe as well. U.S. policymakers are a bit farther down the road of making policy choices and hiking rates. But with the recent inflation backtracking and somewhat weaker growth in hand, the U.S. policy path seems less decided that it did one month ago. The downgrading of China's debt is warning to global investors that China's golden days are now more gold-plated than solid and that it faces challenges to keep its growth rate up. Chinese debt has been less successfully producing growth results than it used to.

The global environment
I think it is safe to conclude that we ae not yet in a consistent global inflation environment. Major institutions have put their toe into the forecasting waters to nudge growth estimates up by a tenth of a percentage point here and there. But there are no bold new projections for accelerated growth or threatening inflation let alone stable inflation at the target level. At the ECB, Mario Draghi has not wavered one bit. Meanwhile, we have yet to see if the various investigations at home are going to impede or undercut the agenda of U.S. President Donald Trump. Early in his terms, there was a lot of hope and many true believers. Now there is the relatively more opposition, not just from Democrats, but from fellow Republicans with a different vision. U.S. policy, once cited as a positive for global growth by the IMF, may not be so effective. And with the new Trump policies less certain in substance and less certain of implementation on a less certain timeline, there is now a more certain case to be made for corporate investment to pull back instead of to spring ahead. We have seen some repricing in financial markets. That process may not yet be over.