Economy in Brief: 2022

The German PPI broke sharply lower in October with the PPI excluding construction falling by 4.2% month-to-month; it rose 2.4% in September and 7.9% in August. The sequential growth rates for this headline PPI show a 34.5% rise over 12 months, a rise at a 30% annual rate over six months, and a gain at a 25.4% annual rate over three months. The inflation process shows a clear slowdown but still very high rates of change in headline producer prices.

But there is a huge gap between the PPI and the PPI excluding energy. The PPI ex-energy did not move lower this month. It rose by 0.5% in October, the same as in September; in August it rose by 0.4% month-to-month. The German PPI excluding energy is up by 13.4% over 12 months; it's up at a 6.1% annual rate over six months, and that drops off to a 5.4% annual rate over three months. I have plotted the ex-energy PPI in the chart above.

Like the headline PPI, the PPI ex-energy shows a deceleration in progress despite the much lesser role of oil and the exclusion of energy prices from this index. Most interesting is the huge gap between the growth rates of the PPI excluding energy and the headline PPI. The PPI ex-energy rises 13.4% over 12 months while the headline PPI rises by 34.5%. That's close to three times faster. Obviously, energy and commodity prices have a lot to do with what's been going on with inflation.

The October reading marks the first observation in the fourth quarter. Fourth quarter-to-date inflation for the headline is falling by 1.3% at an annual rate, but for the core it's still rising at a 5.5% annual rate, in line with its sequential progression.

Monetary policy and prices Monetary policy of course is made at the European Monetary Union level by the European Central Bank not in Germany by the Bundesbank. However, Germany has a high weight in the monetary union and its price developments are important period; it's instructive to look at the difference between the German CPI and the PPI to see what's going on with different metrics for inflation. Through October the German CPI is rising at a 10.4% rate year-over-year, the same as over six months; the pace rises to a 15.8% annual rate increase over three months. The CPI does not show the same headline drop-off that the PPI does since it accelerates. The PPI gives energy and commodities a much greater weight and the services sector is substantially diminished. The CPI and PPI are quite different.

Likewise, the CPI excluding energy is up by 6.5% over 12 months; that pace accelerates to 7.8% over six months and accelerates further into double digits at an 11.3% annual rate over three months. One month into the fourth quarter, the CPI is rising at a 16.7% annual rate where the core is up and 11.5% annual rate.

Oil and OPEC Underlying these statistics is oil. Brent oil prices are up by 10.8% over 12 months; they fall at a 23.3% annual rate over six months and fall at a 38.3% annual rate over three months. Clearly the weakness in oil prices has been helping the headline prices to behave. However, oil prices fell by 7.2% in August and by a further 7.5% in September but then rose by 3.2% in October. OPEC is trying to put a floor under oil prices and that may make the progressive results for the PPI headline just a little bit less relevant.

The UK economy has been under pressure and its politics have been under peril. Markets have a challenging time dealing with the circumstances of the economy and the policy choices made by various UK politicians in the wake of what can only be termed its Brexit fiasco. I don't know how history is going to look at the British exit from the European Union; it certainly isn't going to be something that will be applauded for its economic results. Although that wasn't the reason for doing it. I suppose part of it was a warning to the rest of Europe of how EU membership was spreading political influence through the economic union, something that wasn't supposed to happen which is the reason fiscal policies were never connected. The UK in asserting its independence and autonomy has had to foot a big bill associated with leaving as well as, find a life on its own, and construct a way to deal with Northern Ireland. That was the problem that was the death knell for Theresa May, as Boris Johnson claimed he had a solution that he did not really have. And now, a new Prime Minister is in place, to try to sort it all out all over again. Have we already seen this movie?

The backward glance Notice that the UK economy was hit particularly hard by Covid, and while the confidence numbers show that there was a recovery in confidence it wasn't lasting and there has been a leg down since then that has brought confidence to even a deeper pit than it was in during the worst of Covid. The UK consumer confidence metric at -44 has been weaker over the last 20 years only 1.3% of the time. This is an extremely rare and extremely weak reading. In November, perceptions of the household financial situation over the past 12-months picked up slightly, however, it's still weak with a 22-percentile queue standing. Over the past 12-months households assessed their financial situation as having been in the bottom 4.7 percentile over the last 20 years; the general economic situation is assessed as being in the bottom 8.1 percentile compared to all situations over the last 20 years. The performance of inflation is assessed as having been worse less than 2% of the time. The Covid ‘cure’ appears to have been worse than the disease.

Looking ahead More importantly, looking ahead to the next 12 months, the financial situation, and other metrics regarding consumer satisfaction are even worse. The household financial situation was slightly better month-to-month, still it has been worse only 1.3% of the times over the last 20 years. The expected general economic situation, which also improved slightly month-to-month, has been worse over the last 20 years 1.3% of the time. The unemployment situation expected over the next 12 months worsened in November and has a 75-percentile standing- it's been worse only 25% of the time that's a chilling metric for sure. And looking ahead at inflation, consumers find the outlook for inflation has been worse historically only about 5% of the time. Clearly consumers are concerned, and the economy has a long way to go to be put on level footing

There was little respite by income with lower income people assessing conditions as worse less than 1% of the time while upper income people assess conditions is having been worse about 6% of the time.

The UK is going to deal with this situation by implementing a policy that will be aimed at increasing tax revenue and hoping that that doesn't damp growth. Policymakers always have a hard time making a choice between doing something that they think will pay off right now and doing something that will have a bigger payoff in the future even though it's immediate payoff Cannot be quite so clear or might even be controversial.