EMU PPI 3-Month Back Off Still Large 12-Month Gains

Among the 11 early reporters of the PPI (or in the case of Austria, the wholesale price index), the median increase in September was a rise of 0.2%. This is a downshift from the 3.6% increase in August but an improvement from the 0.2% decline in July. Europe is clearly in a period where prices are somewhat volatile in the wake of some energy price and commodity price instability.

However, the overall median for 12-months, 6-month, and 3-month price changes for the PPI excluding construction among EMU members shows a deceleration in the pace from 35.6% over 12 months to 25.6% over six months to 20.8% over three months. This is some significant deceleration; however, the pace of inflation is still tremendously high.

The results in the table are for September 2022. They show an increase of 35.6%. One year ago, the year-on-year increase was 17.4%. The year before that, the 12-month period ended September 2020 had the year-over-year PPI median fall by 3.2 percentage points.

The PPI is most volatile of the 'major' inflation statistics because it's weighted toward commodities and oil, goods that have been bearing the brunt of the inflation process recently. In the table, Ireland shows some of the most outrageous increases for the PPI over three months, six months, and 12 months. Setting its wild numbers aside, Germany has the highest percent gain over three months at 84.6%. Over six months, again, Germany posts the largest gain at 53.5%. But over 12 months the largest annual gain is from Italy at 53.2%, followed by Belgium at 49.5%, and then Germany at 46.9%. On the same profile, the weakest increase over three months is from Austria at -8.9%; over six months there's a decline of 6.1% in Greece; over 12 months there's much more clustering but the weakest gain is from Austria at 20.6% followed by Portugal at 21.6% and Finland at 24.6%.

The PPI for 12-months ago - its 12-month increase for the period ended in September 2021 - shows a median gain of 17.4%. However, clustered around that median gain, the lowest increase in the table is France at 11.9%, stepping up to Germany at 13.4% and Portugal at 15.5%. At the top end, the biggest gainers are Ireland's 82%, a 25.6% increase in Belgium and a 23.9% increase in Spain.

Inflation shows some significant variability but clearly the pace has been high and one of the key reasons has been oil prices.

We have two early observations on a PPI excluding energy; one comes from Germany and the other is the number from the U.K. (which is no longer an EU member). The U.K. number is a core number excluding food, tobacco, beverages, and petrol. Both the German and the U.K. figures increase by 0.5% in September and by 0.4% in August. They diverge in July with a 0.4% increase in Germany and a 1.3% increase in the U.K. Sequential data show a tendency for the ex-energy or core inflation rates to abate but the progression is not absolute. In Germany and the ex-energy pace for inflation goes from 13.8% over 12 months up to a pace of 15% over six months then down sharply with a 3.8% pace over three months. In the U.K., the core rate goes from a 16.4% increase over 12 months up to 18.9% pace over six months and then down to a pace of 12.2% over three months. In both cases, the three-month pace is sharply lower than either the six-month or the 12-month pace.

The ex-energy or core inflation reported by Germany and the U.K. show an annual rate pace that hovers around the 15% area more or less and that is considerably better than the median, 35.6% annual rate, for all the countries in September.

It's clear from the table there are significant inflation variations over the different horizons. To put a number on it empirically, I remove Ireland from the matrix of calculations because it's so extreme. After doing that, the standard deviation among the annualized rates have showed increases from 12% dispersion over 12 months to 17% dispersion over six months to nearly 30% dispersion over three months. It's not surprising to see variability increase over shorter periods, but this is nearly a threefold increase in inflation variability from 12-months to three-months. If we keep the periodicity the same, at 12-months, inflation variability rises from the year ended September 2020 from 1.4% to 4.6% in the year ended in September 2021 to 11.9% in the 12-month period ended in September 2022. In some sense, the increase in divergence is real and not simply a function of looking over shorter time periods. The greater the dispersion among key policy metrics, the harder it is to make policy in the EMU area.

A challenging outlook Inflation, the inflation outlook, and concern about inflation, continue to drive policies in the United States, the United Kingdom, and the European Monetary Union. The World Bank and the IMF are concerned about the impact of interest rate increases on the world economy and the developing economy, and these are appropriate concerns but as much as these institutions may have these concerns, they can't stand in the way of solving a problem that will only get worse if it's not addressed. The IMF shares that conclusion even as it warns of the consequences of inflation fighting. Central banks and international institutions seek to have the best inflation fighting to control inflation the fastest and bring it to the most tolerable level in a way that creates the least possible disruption. However, in that sentence there are too many maximization desires and too many minimization desires to have them all be compatible with one another. At some point, central banks are going to have to make a choice between reducing inflation, reducing its pace to a low level, and having concern over the impact on the economy. That decision and those collisions lie ahead.