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Economy in Brief

German PPI Continues to Make Strong Gains in February
by Robert Brusca  March 21, 2022

German inflation rose sharply in February, gaining 1.4% after rising 1.9% in January and 5.1% in December. These are increases month-to-month for the German ‘headline PPI,' the PPI excluding construction; they are exceptionally large month-to-month gains. The German PPI excluding energy rose by 1% in February following a 2.2% gain in January and a 0.6% gain in December. The heat is on…

Sequential prices growth
Over three months the headline PPI series is up at a 38.8% annual rate; over six months it's up at a 35.8% annual rate; over 12 months it rises at a 25.9% annual rate. These statistics show a slight acceleration for inflation with inflation running at an extremely rapid pace. Inflation data continue to be quite unsettling. For the PPI excluding energy, inflation is up at a 16.5% annual rate over three months; that's an acceleration from 12.5% over six months and a nearly identical 12.4% rise over 12 months. The inflation measure excluding energy is also extremely high and indicates that inflation is entrenched quite beyond the impact of energy on headline inflation.

Quarter-to-date PPI
In the quarter-to-date, the PPI headlines series is running at a 34.3% annual rate of increase at this point; that reflects the January plus February PPI indexes divided by the fourth quarter index average annualized. Calculated the same way, the German PPI excluding energy is up to 17.3% annual rate. Both are quite strong gains and certainly out of the tolerance range for the central bank. They contribute to the view that inflation not only remains problematic but that the problem is worsening.

Compared to the CPI
However, the European Central Bank looks at consumer price inflation, particularly at its HICP measure. In Table Germany's PPI, we have chronicled the behavior of the German domestic CPI as a point of reference. The CPI shows much smaller increases than the PPI but still strong increases and a demonstration of acceleration. The headline CPI is up at a 7.4% annual rate over three months; that accelerates from 6.7% over six months and that's up from 5.2% over 12 months. The German CPI excluding energy is up to a 3.7% annual rate over three months, compared to 3.5% over six months and a 3.2% pace over 12 months. Again, these are excessive rates of inflation compared to a target of 2% by the ECB for overall EMU inflation.

Quarter-to-date CPI
The CPI gains are not as outlandishly strong as the PPI inflation figures show. But in the quarter-to-date, inflation is unfolding rapidly; the CPI is up at 8.5% annual rate and the CPI ex-energy is up at a 4.3% annual rate. Inflation continues to accelerate and to be stubborn at extremely high rates of inflation.

Table Correlation of Prices and Brent shows the impact of Brent oil prices on various price indicators and their core or ex-energy treatments It looks at the impact both in terms of the correlation between the level of the price index and the level of the Brent index as well as the percent change year-over-year in the index versus the percent change year-over-year in the Brent price. Look at in this way, the PPI headline has a 0.57 correlation to the level of Brent prices and a 0.54 correlation, nearly the same, year-over-year correlation to changes in Brent prices.

Excluding energy, the correlation between the PPI and Brent is 0.44 for price level to price level comparisons; it is even higher, at 0.57 looking at percentages compared year-over-year.

Turning to the CPI, the German CPI correlation to the level of Brent prices is 0.36 and the correlation to the year-over-year percent change is higher at 0.57. However, the correlation between Germany's ex-energy CPI shows the headline correlation price level to the Brent prices level is 0.26 while the percentage change correlation for the year-over-year percent changes is a very small 0.07. The CPI headline responses to Brent are higher on either comparison and the response of the core to Brent is muted in comparison for both price level comparison and for year-on-year comparison.

The core inflation rate for the CPI year-over-year shows a very, very, small correlation between oil prices and inflation. Still, when we look at the hard data for the German economy, even core CPI inflation in Germany is running hot; it's nowhere near as hot as the headline for the CPI or the two measures for the PPI inflation. Here we see the wedges between what Brent does to the CPI vs. the PPI, the headline, and the core. The CPI core which is a much better-behaved is more insulated measure. However, no matter how you measure inflation for Germany right now it's excessive. The strong gains in the core after this analysis suggest that real- not just oil - inflation is running hot. Germany has areal inflation problem. Still, inflation overall is generally accelerating in the background. Oil prices and other materials prices continue to advance.

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