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Economy in Brief

Portugal and Europe: Inflation Pressures Wither But Are Complicated
by Robert Brusca  September 19, 2022

PPI Inflation in Portugal
Portugal's PPI falls by 0.9% in August after rising 0.4% in July and by 2.4% in June. This sequential growth rates for producer prices in Portugal show an annual rate of 22.5% over 12 months that eases slightly to 21.7% over six months, then it falls dramatically to an 8.2% annual rate over three months.

Manufactured goods at the producer level show a decline of 1.4% in August after a 1.4% increase in July and a 3.5% rise in June. Manufacturing prices were at a 23.4% pace over 12 months then accelerate to a 36.3% annual rate over six months then decelerate sharply to 14.8% pace over three months. Clearly the hallmark for inflation here is ‘different strokes for different folks.'

Looking at PPI sectors in Portugal monthly, consumer goods prices rise by 0.7% in August, the same as in July but are down from the 1% gain in June. Broader sequential growth rates show consumer goods inflation up 13.9% over 12 months, rising to a 16.6% pace over six months and easing back to a 10% pace over three months. Intermediate goods prices rise by 0.4% in August, by 0.2% in July, and by 0.6% in June. Its broader sequential growth rates show a 19.8% annual rate gain over 12 months, nearly the same gain at a 20% pace over six months, slowing sharply to a 4.9% annual rate gain over three months. Capital goods show a 0.5% increase in prices in August, after 0.3% drop in July, and a 0.5% drop in June. Capital goods sequential patterns show prices rise by 4.7% over 12 months, the pace picks up very slightly to a 5.2% pace over six months then plunges to decline at a 1.1% annual rate over three months.

Portugal shows very different inflation performance and trends for different sectors for data up to date through August. Intermediate good (followed by consumer goods) have the highest inflation rates among sectors over 12 months and six months; consumer goods lead the way higher over three months. Capital goods inflation is the lowest on all horizons, showing a sharp deceleration over three months and logging a net price decline. Capital goods run a rather moderate increase over 12 months of 4.7%.

Table 1: Portugal's PPI by Sector

Producer Inflation Trends by Sector in Europe
Table 2 below looks at PPI inflation rates by sector for Europe as a whole, mostly focusing on European Monetary Union members. For this table, we have data through July since that's the most up to date and the most comprehensive available. Start by looking at the sequential growth rates for the three sectors. In each case, we pull the data for eleven countries. We calculate the median increase for sector inflation across the 11 members and present that in the table. The table also presents the diffusion calculation or the breadth of inflation performance across those eleven countries in each sector over various time horizons ranging from monthly to sequentially.

Consumer sector PPI
These results show consumer sector diffusion is up across all countries at 100% over 12 months, and over six months; but over three months, the tendency for consumer inflation to accelerate across countries is down, with a diffusion reading of 30%.

About diffusion
Diffusion readings above 50% indicate that there is more acceleration than deceleration in inflation. Diffusion is calculated by adding all the observations where inflation accelerates period-to-period and half of the observations where inflation is unchanged dividing that sum by the total number of observations. For example, inflation accelerating everywhere brings a reading of 100%; inflation increasing nowhere brings a reading of 0%. Inflation increasing in half the members and decelerating in the other half brings a reading of 50%, the same reading as if inflation were unchanged in all reporters.

Capital goods diffusion
For capital goods, inflation diffusion is 90.9% over 12 months, 81.8% over six months and down to 45.5% over three months.

Intermediate goods diffusion
Intermediate goods diffusion shows broad acceleration over 12 months and six months, with 12-month diffusion at 90%, six-month diffusion at 100%. Then, there is the sharpest deceleration possible, as diffusion falls from the top-most reading to the bottom-most and logs 0% over three months. Over six months inflation was accelerating across all the countries for intermediate goods, whereas over three months inflation was accelerating in none of the countries.

Diffusion by month
The individual monthly numbers show that median consumer diffusion was under 30% in May and June but stepped up to 45.5% in July. For capital goods, diffusion was also under 30% for May and June and stepped up to show modest acceleration at 54.5% in July. For intermediate goods, all the diffusion figures are especially weak, showing 0 diffusion in May, 9.1% in June and 18.2% in July.

Diffusion recap
Inflation diffusion in the table shows extremely high diffusion values over 12 months and over the 12-months previous, with diffusion ratings ranging from 81.8% to 100%. These show the impact of higher energy and commodity prices as well as food prices during this period. Over six months most of the readings remained quite strong in that same range, in fact. But over three months suddenly there is a sharp change with diffusion falling out of that 81.8% to 90% range into the sub 50% range and as low as zero for intermediate goods.

Actual median inflation by sector
The table chronicles the median increase by sector among the eleven countries for each of these time horizons. These statistics show that the median PPI consumer price increase was 13.2% over 12 months, 19.1% over six months and 15.4% over three months. While three-month diffusion fell sharply (from 100% to 30%), inflation itself does not seem to fall as sharply. That means that inflation decelerated broadly; however, the inflation rate itself for consumer goods only fell modestly to 15.4% for the median compared to 19.1% over six months.

For capital goods, median inflation was 8.2% over 12 months, rising to 8.7% over six months, then falling back to 8.1% over three months. Although the diffusion rate falls from 90.9% over 12 months to only 45.5% over three months, the inflation rate itself barely works lower on that comparison from an 8.2% pace over 12 months to an 8.1% pace over three months. Diffusion is an important reading, but we must remember to pair it with the observation on the inflation rate itself to understand it fully.

For intermediate goods, median inflation is up 20.8% over 12 months, up at a 22.3% annual rate over six months but then it fell to a much lower, 7% pace, over three months. And, of course, the diffusion comparison shows inflation up at a 90% diffusion reading over 12 months and then down to zero over three months. But at zero diffusion, inflation is still running hot at 7%.

While inflation is lower and falling, a sequential comparison of the individual recent three months shows that there is still a lot of inflation lingering. For example, the median monthly consumer price increase at the producer level ranges between 1% and 1.2% from May to July; those are still double-digit rates of increase when annualized. Capital goods prices monthly show the increases in the range from 0.6% to 0.4%; those imply better behaved inflation than for the sequential growth rates for the most part but still inflation that would be considered too high for price stability in the euro area.

Intermediate goods inflation falls from 20% or more over 12 months and six months to a 7% pace over three months. Its monthly comparisons show stepwise declines in inflation from a 1.5% increase in May, to a 0.5% increase in June, to a 0.3% decline in July. These individual months would annualize into very different rates of inflation but on average they're much lower as you can see from the three-month inflation rate. If we consider the progression in train, inflation progress is more impressive.

Table 2: PPI Trends in Europe

Summing up
These statistics adequately represent what is going on with the inflation front. We know that energy prices have broken lower relatively sharply. Europe, however, is a more complicated case since the energy pipeline from Russia has been shut and it's not at all sure about its energy supplies in the future. Food prices globally continue to linger at high rates of change. While the top may have come off commodity prices, that becomes complicated because commodities are expressed in dollar terms in global trade. The dollar has been rising and that causes commodity prices expressed foreign currency terms to become more expensive. The consumer goods sector shows that inflation is still high - way too high - and way too stubborn despite encouraging diffusion statistics. The rates of change in prices both sequentially as well as their annualized monthly counterparts are simply intolerably high. Intermediate goods offer a cleaner picture of inflation progress with the sequential price increases fading and diffusion falling from the highest reading to the lowest reading and with monthly data moving consistently and strongly the lower readings even showing a decline in the most recent month. However, as we know intermediate goods prices can be some of the most volatile and least trustworthy in terms of setting a trend.

On balance, I think the data here reasonably summarize the European PPI situation: there is evidence of deceleration, but the trends are still complicated, inflation is stubborn, and it is higher than the European Central Bank is going to feel comfortable. Inflation is probably going to be that way for some time. The outlook for Europe is further complicated by war in Ukraine and the twists and turns that are occurring there as well as how Europe fares with its energy supplies. I'm sorry to conclude that it's complicated but it is, and I think I've laid out the various trends and strands for you to see clearly and to understand that amid progress and amid some clear progress, there continues to exist significant challenges and more inflation fighting work lies ahead.

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