German PPI Dives But Core Rate Advances

Germany’s PPI in March fell by 0.7%; this is for the headline series excluding construction. The quasi-core PPI, excluding energy, rose by 0.2% in March. The headline series shows a number of months with the inflation rate negative, that is, with the price level falling, while the PPI excluding energy its flat in January with a 0.2% increase in February and in March. The stellar performance of the headline owes to weakness in oil prices.

Progressive inflation calculations on the PPI headline shows a decline of 0.2% over 12 months, a decline at a 0.9% annual rate over six months and a decline at a 4.9% annual rate over three months. These are progressively improving inflation dynamics; in fact, inflation that might be alarmingly weak under other circumstances. However, the PPI excluding energy is up by 1.5% over 12 months, up at a 1.2% annual rate over six months and up at a 1.4% annual rate over three months. These are clearly moderate increases in inflation and the quasi-core rate for the PPI has clearly stabilized.

In the first quarter, the German PPI inflation rate is falling at a 2.1% annual rate as the PPI excluding energy is rising at a 1.1% annual rate.

PPI components are not seasonally adjusted and are a little bit less interesting because of that. But the patterns for consumer goods, investment goods, and intermediate goods in the PPI show that all of them have stronger three-month annualized growth rates than 12-month growth rates, the opposite signal that we get from the headline which is seasonally adjusted.

Of course, monetary policy focuses much more on CPI prices than PPI prices; on that basis, the German CPI is up 2.2% year-over-year compared to a CPI ex-energy that's up at a 2.7% annual rate. Inflation presented on a CPI basis is much hotter than it is on a PPI basis and that's not surprising because the PPI is focused on the goods sector and production in Germany while the services sector has a much higher inflation rate and an inflation rate that tends to be more stubborn to change.

The table also chronicles the impact of Brent oil where prices fell by 3.5% in March after falling 3.8% in February. Over three months Brent is falling at a 4.6% annual rate which is a stronger decline than a 1.3% annual rate drop over six months, but year-over-year the Brent price is still down by 14.6%, and that larger, longer-lasting decline is probably still working its way through the pipeline into German prices.

On balance, Germany's inflation rate in its factory sector is well behaved Headline inflation has been lower than where it is now only about 29% of the time, while excluding energy PPI inflation has been lower 60% of the time and higher only about 40% of the time. These rankings are based on year-over-year inflation rates for the PPI and the ex-energy pace on data back to 1990. Clearly core inflation is more stubborn than the headline; the headline, of course, is being influenced by the weak energy prices but whether we look at ex-energy prices taking them at face value or on a historic jaunt, ranking them, they seemed to be well behaved and this is also the view from the ECB.

The ECB just cut interest rates today in the EMU. In addition to these trends in inflation, there are concerns going forward about the impact of tariffs. While tariffs can tend to raise the domestic price level, they do not raise inflation unless the tariff effects linger and are embraced by producers and consumers raising their inflation expectations or unless accommodated by the monetary authority. If that were to happen, then the risk of inflation being stoked by tariffs would rise considerably.

Tariffs have the dual effect of raising import prices and making the economy weaker and, if the economy gets weaker, that would likely be a tempering force mitigating upward pressure that might come from the direct imposition of tariffs themselves. Of course, the whole tariff game right now is up in the air, and we can't be sure exactly what the next step is by the U.S. and whether the U.S. and the European Union are going to be able to put their heads together and come to an agreement without punishing each other with higher tariffs first. It's possible that the Germany, the EU, and the U.S. could dodge a bullet; it's also possible that they could take a bullet. Policy is being conducted in a very careful, rarified, fashion. Just yesterday Chair Powell in the U.S. gave his speech noting that tariffs tended to move the Fed away from both of its objectives that, of course, makes monetary policy much more difficult to execute. The ECB and the Fed face the same dilemma.