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Economy in Brief

German Inflation Jumps Sharply in March
by Robert Brusca  April 12, 2022

German inflation surged in March, jumping by 2.1% month-to-month in March alone. In ECB parlance, the HICP target is for a gain of 2% over 12 months, not in one month. The German contribution to EMU-wide inflation is way over the line. German core HICP inflation is more modest in March but still excessive. It is up by 0.5% month-to-month for an annualized rate of 6.1%.

Headline inflation trends
Over 12 months, the German HICP is up by 7.6%. Over six months, the annualized pace is 11.4%. Over three months, the pace is up to a whopping 17.6% - I won't try to annualize the month-to-month gain for you, but that is going to be in the stratosphere.

Core inflation trends
The core rate is up by 3.7% over 12 months and its annualized pace over six months rises to 4.2%. But over three months, the HICP core pace is back down to 3.7%. That is good news and evidence of inflation resilience in the face of a raging headline. However, the German domestic CPI is not so upbeat as its 3-month core pace accelerates from three-months to six-months to 12-months, with no drop-back.

Inflation diffusion – a hopeful sign?
Inflation diffusion, the breadth of inflation acceleration across the main CPI categories, is at 81.8% for year-over-year inflation-that metric compares the 12 month-rise in price changes across categories to their respective 12-month increases of 12-months ago. Over six months diffusion drops to 54.5%, a comparison of inflation acceleration over six-months relative to 12 months. That acceleration is modest despite the actual very strong gain of inflation over six months. Over three months as well the diffusion reading is 54.5%; that metric compares inflation acceleration over three months compared to over six months. Diffusion at 100% indicates inflation accelerating in all categories; diffusion at zero percent indicates inflation accelerating in no categories. 50 percent is the 'point of neutrality' where inflation acceleration and deceleration are balanced. At 54.5% diffusion three- and six-month inflation acceleration this month is showing some net increased inflation pressure, but not much. Certainly, diffusion suggests that the breadth of inflation is not as intractable as inflation strength suggests. Whether this is good news or evidence that inflation must spread further before it can settle down, only time will tell.

Where inflation is most intense
Over three months inflation accelerates in six categories: a 46.8% annual rate in transportation, a 26.8% annualized gain for rent & utilities, a 9.7% pace for food, a 8.8% for restaurants & hotels, a 6.6% pace for alcohol, and a -1.3% pace for communications (since over six months prices in that category had fallen even faster, the 1.3% drop is technically a period-to-period acceleration). Over six months the same categories accelerated except that communication drops out replaced by recreation & culture. Over 12 months acceleration is broad based; it accelerates everywhere except for two categories: education and 'other.'

Brent oil prices
During this sequence of dates, Brent oil prices measured in euros have accelerated from a rising pace of 85.3% over 12 months to 156.8% over six months to 461.1% over three months. A great deal of the inflation acceleration impulse is coming from oil and commodities and through food. Transportation and 'rent & utilities' are the leading two inflation categories in each time segment with food in the third position each time. Still, food and energy are important and just because inflation is intense there does not mean it will stay there and not migrate to other categories. When food and energy cause cost pressures, that often generates broader price pressures as well. So, while the breadth of inflation in Germany is restrained since so much of the inflation has been recent, it is not yet clear how much of it has yet to be transmitted into final product prices before prices can stabilize and inflation can settle down.

The inflation dynamic-Economics ≠ arithmetic
This is not just a matter of arithmetic and passing through proportional price increases but also of consumer and business responses and expectations since labor will want to up its remuneration to make up for rising prices and that will in turn push up product costs for businesses. This is the famous wage-price spiral that central bankers seek to curtail by raising interest rates and controlling expectations. If expectations can be stabilized, worker demand may only seek to catch up on past real wage losses instead of also trying to feather the paycheck for price gains expected in the period ahead. To accomplish that, the central bank must be nimble. It is not clear that either the ECB or the Federal Reserve Bank in the U.S. -where inflation also has surged- have moved fast enough to accomplish that goal. We are all watching inflation and wondering about the future.

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