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Economy in Brief

EMU PPI Continues to Rise Strongly
by Robert Brusca  September 2, 2021

The EMU PPI excluding construction rose by 2.0% in July month-to-month. That followed an already strong 1.5% gain in June. The PPI is on a clear accelerating path as one-year inflation was falling at a minus 3.1% pace as Covid swept through Europe. Right now, the 12-month pace, aided by that weak base effect, is at 12.1%, but the six-month gain that is free from that base effect and whose base is in February of this year, is up at a whopping 18.9% annualized while the three-month annualized gain is at 21.4%. This sequence goes far beyond being boosted by ‘base' effects.

Sector breadth of inflation
Capital goods and intermediate goods prices show accelerating trends. Consumer goods break the mold as consumer prices gain at a 3.8% annualized pace over three months compared to a pace of 4.8% over six months; they decelerate over three months. But the three-month pace is still stronger than the year-on-year gain for consumer prices.

Inflation across Europe
The table lists 12 EMU member and includes Sweden and Denmark at the bottom. Among the 12 EMU members, inflation accelerates compared to June in eight of them on a month-to-month basis. Over three months, inflation accelerates among half of the members; it decelerates for the other half. Over six months, inflation accelerates everywhere. Over 12 months compared to a year ago, all rates are higher. Inflation is accelerating on the sequences in the table for Sweden and Denmark as well, although Danish inflation does ease in July from its June pace.

Role for oil?
Oil would seem to have a big hand in this as Brent prices are up over 12 months by 71.7% compared to have fallen year-over-year by 32.7% one year ago. Brent's gains accelerate to an 81.2% pace over six months then slightly back off to a still super-charged pace of 67.7% annualized over three months. Brent gains slowed in July after rising by 7.8% in June but still gained 1.1% in July.

Brent's year-on-year gains are most strongly correlated with manufactures prices followed by intermediate goods, consumer goods, and capital goods, in that order. Consumer goods prices are the one sector where inflation is not accelerating while capital goods prices are accelerating despite the correlations that show capital goods tend to be less affected by Brent gains and consumer prices tend to be more affected. Right now the three-month results are contrary to that.

Across this group of 14 countries (that includes Sweden and Denmark), the highest correlation between inflation and Brent is in Portugal, second is Sweden, third is Ireland. But the highest inflation is in Ireland, Belgium, and Denmark, in that order. The lowest correlation with Brent is in Denmark, Belgium and a tie between France and Germany. The lowest year-on-year inflation in the table is Germany, France, and Austria. The ranking between the correlation with Brent and inflation among these 14 countries has a very poor 0.05 correlation. While oil prices have been quite strong, oil does not explain the inflation differences across EMU members.

This is another way of saying that inflation is complicated as it is likely coming from a variety of course. There is some oil effect -larger for some countries than others, there is some base effect, and there are some different issues possibly related to labor market dislocations and supply chain issues. But the failure of oil to explain much inflation here suggests that inflation is a much more complicated phenomenon that a knee jerk response to oil prices.

Summing up
That does not mean that inflation will be more or less reversible because this analysis does not identify why inflation is high. But it is high in the EMU, in other Europe, as well as in the United States. There clearly are global dimensions to the inflation problem. But whether these dimensions will be sticky or will dissipate quickly is keeping central bankers up late at night. In the U.S., the central bank is already leaning to begin to withdraw some stimulus. In Europe, the topic is a live one for discussion, but there is no official nod from policy makers yet.

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