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Economy in Brief

Belgian Inflation Keeps Up Strong Pace in August
by Robert Brusca  August 30, 2022

Belgian inflation, which tracks well with European Monetary Union (EMU) inflation trend, was up strongly again in August, rising by 0.8% after rising by 0.7% in July. The core CPI rate for Belgium rose by 0.4% in August after a 0.9% increase in July, marking a substantial deceleration. Over the last four months, the core CPI in Belgium has been up month-to-month on gains of 0.4%, 0.9%, 0.5%, and 0.4% back through May. The July acceleration, which unwound in August, was the outlier of the bunch. The Belgian core CPI has been running more consistently at gains of 0.4% to 0.5% month-to-month recently.

Belgium's CPI shows a 9.9% gain over 12 months and 8.8% annualized gain over six months and then to reaccelerate to a 10% pace over three months. The core rate shows the steady acceleration, rising from a 5% pace over 12 months to a 6.2% pace over six months to a 7.5% pace over three months.

The table (below) calculates diffusion for month-to-month percentage changes, and for sequential inflation rates, comparing 3-months to 6-months, 6-months to 12-months, and 12-months to the 12-month gain of one year ago.

Monthly diffusion for Belgian inflation has decelerated from 75% in May to under 50%, at 45% in June, back up to 55% in July and 55% in August. These diffusion indexes are constructed like the U.S. ISM and like the S&P Global indexes. They consist of taking all the categories in which inflation accelerates and half of the categories in which inflation is unchanged as a percentage over the total count of categories. When the diffusion reading is over 50%, it shows that there are more accelerating than decelerating categories. When it is less than 50%, it shows there are more decelerating than accelerating categories. The monthly data show that May inflation was still hot and accelerating broadly across categories; however, that cooled sharply in June and has given way to moderate inflation acceleration across categories in July and in August – even though July and August show the weighted average pace of inflation has remained intense.

Looking at the diffusion over the broader sequential periods, over 12 months inflation accelerates broadly. The diffusion measure is at 90% which is extremely high; it compares inflation in August of 2022 to its year-over-year pace in August 2021. The six-month pace show diffusion of 60%, demonstrating relatively wide inflation acceleration, but much less broadly than for the 12-month period. The three-month diffusion pace is down to 45%, indicating that there is more inflation deceleration over three months than acceleration across CPI categories compared to their pace over six months. That's a good sign based on comparative unweighted categories. However, we can see that for both the headline and for the core when we introduce weighting for the categories (as is the case for headline and core inflation), the overall inflation rate is faster over three months than six months and the core rate is faster over three months than over six months. However, the fact that inflation is not quite so broadly shared is still a good marker and potentially good news for calming inflation in the future.

Belgian inflation has a solid correlation with the inflation trends in the European Monetary Union. In this cycle, Belgium's inflation rate has been out in front of the EMU, accelerating at a little bit faster pace than the EMU. Belgium also is importantly linked to the German economy and its year-over-year CPI inflation rate has an R-squared relationship to the German HICP of 0.79, marking a strong general correlation between inflation in the two countries. Even so, since COVID has struck, there has been a lot of common movement in the German and Belgian inflation rates but the month-to-month percent changes in Germany and in Belgium have had an R-squared relationship of only about 0.3. That indicates that while in the long-term Belgium can explain about 79% of the variance in German inflation, in the very short term it explains only about 30% of the variation in German inflation. However, we do have a preliminary HICP estimate for German inflation that shows its headline gain is at 0.8% month-to-month in August, and its year-over-year gain is up by 8.9%. The rest of the details for Germany are still unavailable for either the German CPI or for the HICP.

Belgium's role
Belgium serves as an early litmus test for what inflation is doing in the EMU area. So far, the early reading on this index is not good, as it suggests inflation is still running at a torrid pace although there's some glimmer of hope from the performance in diffusion which shows some signs of backing off or at least diminishing in recent months. This isn't the kind of report that's going to delight the ECB. The ECB still has a lot of work to do; it needs to raise rates substantially to fight inflation and it's still in a very difficult position as it tries to combat currently high inflation plus pay attention to the potential for energy supplies to be disrupted.

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