German PPI Shows Inflation Dichotomy - Excluding Energy Is Misbehaving

Headline German inflation has logged another stellar number showing prices down 0.7% in April after falling 0.7% in March and dropping by 0.2% in February. German inflation over three-months is falling at a 6.4% annual rate, over six-months it is falling at a 2.6% annual rate, and year-over-year it is falling by 0.9%. That progression shows clear discipline for German headline inflation and, in fact, raises the specter that inflation might be too weak with year-over-year inflation falling -1% at an annual rate, however, that's only part of the story

Polar opposite trends for the headline vs ex-energy In April the PPI excluding energy rose by 0.3%, it rose by 0.2% in March, and by 0.2% in February. The same progression for the PPI X-energy shows inflation running at 2.7% annual rate over three-months at a 1.9% annual rate over six-months now to a 1.7% annual rate year-over-year. This means, of course, instead of decelerating with prices receding, inflation is accelerating and rising. These are not just slightly different takes on inflation, these are polar opposite events, calling for polar opposite concerns, and polar opposite policies.

The role of oil When we wrote about CPI results earlier, we pointed out the same phenomenon was in place with headline CPI inflation very well behaved and core inflation not doing quite as well (see the CPI data in the table above). However, with the PPI this dichotomy is even clearer and it comes with the same source of divergence, the fact that Brent oil prices have been falling sharply the table shows Brent oil prices (adjusted into Euro terms) falling in April and March and in February and further shows the euro cost of Brent oil prices prices falling at a 60% annual rate over three months, following the 25% annualized drop over six-months, and the the 28% annual rate over 12-months. Oil prices are the engine that is making the inflation performance look good. However, beyond energy, the forces of inflation are still firm, still percolating, and in PPI terms, while they are at an acceptable year-over-year pace, they are beginning to accelerate as the three-month pace for inflation at 2.7% is too high.

Inflation by sector Inflation statistics by category shows consumer goods (NSA) inflation at 3% over 12 months, 4.5% over 6-months and at a 4.8% annual rate over three-months - excessive and accelerating. For investment goods inflation runs at 2% year-over-year up at a 2.8% pace over 6-months and then at a 2.4% pace over 3-months not exactly accelerating but both three- and six-month inflation rates rise above the preferred 2% year-over-year pace. Intermediate goods show inflation at 0.3% over 12-months, rising to 1% at an annual rate over 6-months and at a 3.5% annual rate over three-months.

The table includes the CPI as a reference point and there we see that the CPI sequentially is running at a fairly steady 2.1% to 2.3% annual rate. The ex-energy inflation rate is higher although still relatively flat in the 2.6 to 2.8% range- roughly one-half of one percentage point hotter than the headline.

Q2 Inflation Starts the quarter mixed Inflation in the second quarter, a quarter that data-wise is just beginning, shows the headline PPI falling 6.1% at an annual rate with the PPI ex-energy rising 3.1% at an annual rate sector readings show consumer goods, investment goods, and intermediate goods inflation runs between slightly- to substantially-excessive early in the second quarter. The German CPI and CPI ex-energy readings are running slightly hot even though on this time horizon Brent-euro-based oil prices are falling at nearly 50% annual rate.

Wrap on inflation: a dichotomy, but not a real problem A German PPI is not disturbingly strong but once again it's slightly strong and only the headline is really behaving and that's under the influence of some extraordinarily supportive news from oil prices. The headline, in fact, looks worrisome in the other direction because of the ongoing oil price collapse. On balance inflation in Germany appears to be still somewhat stubborn. Germany continues to be buffeted by the forces of war and the uncertainty over US tariff policy as well as the prospect of its own recently inherited burden to take care of its own defense expenditures, something that is likely to underpin growth in Germany and possibly to stoke more inflation pressures. These factors continue to be the main forces to keep an eye on in Germany. For its part, the ECB has warned that the future may be shaping up with different risks.