Economy in Brief: July 2022

Inflation in the euro area rose sharply again in July, bringing the year-over-year pace to 8.9% compared to a 12-month pace of 8.6% for June. Inflation is running at a pace that is multiples of the European Central Bank’s target of 2%. However, the ECB has finally started to raise rates and, as we showed in a previous research piece, there is a more pronounced inflation-damping impact in train from the slowdown in money supply growth in Europe, which may also be eventually having some impact on the inflation rate.

For now, inflation is still running out of control. In July, the headline inflation accelerated in Germany compared to the gain in June but decelerated in France, Italy, and Spain.

Over three months inflation is decelerating in Germany and in France; it's accelerating in Italy and in Spain. German inflation rises at an 8.4% annual rate over 12 months, at 9.2% pace over six months and falls back to 6.3% over three months. In France, the progression is from 6.8% over 12 months, up to 9.3% over six months and down to 8.4% over three months. Italy and Spain show acceleration across all horizons. In Italy, the 12-month gain of 8.3% moves up to an 11.3% pace over three months. In Spain, the 10.8 percent 12-month pace moves up to a 15.2% annual rate over three months.

In three of four cases, excepting Germany, the three-month inflation rate remains higher than the 12-month inflation rate. In Germany, the three-month rate has dropped to a 6.3% pace from 8.4% over 12 months, a potentially significant drop. In France, the 3-month-to-12-month acceleration is over one and a half percentage points. In Italy, it's three percentage points; in Spain, it's on the order of four and a half percentage points. Inflation for the whole of the European Monetary Union accelerates from 12-months to three-months with a three-month pace about one percentage point stronger than the 12-month pace.

Ex-energy/core trends In Germany, ex-energy inflation gains 4.4% over 12 months, accelerates to a 5.1% annual rate over six months then falls back to a 4% pace over three months The German ex-energy inflation pace, like the German headline pace, is weaker over three months than over 12 months. In Italy, core inflation steadily accelerates from 4.2% over 12 months to 5.6% over six months to 7.7% over three months. The core rate in Italy over three months is higher by about 3.5 percentage points than the 12-month pace – a bit more acceleration than for the headline.

Between June and July, the 12-month inflation rate also stepped up to 8.9% for all EMU from 8.6% in June. The country level inflation rates saw Germany’s rate rise to 8.4% from 8.3%; the French rate rose to 6.8% from 6.5%; the rate in Spain rose to 10.8% from 10% in June. However, in Italy, the inflation rate settled lower at 8.3% in July compared to a rise of 8.5% in June. Germany’s ex-energy inflation rate accelerated in July to 4.4% from 4% in June. The Italian core inflation rate was unchanged between June and July at a pace of 4.2%.

Energy prices for Brent expressed in terms of euros saw a 3.8% decline in July after rising 23.1% in June and by 9.6% in May. The acceleration pace from 12-months to six-months to three-months are still impressively large.

The ramp up in inflation has brought the HICP up to a stunningly high – previously unthinkable- level in July. However, the year-over-year rate has not been this high for that long. In January, it was as low as 5.1%; in July 2021, just a year ago, its pace was a barely excessive 2.2%. As an example, the five-year compounded inflation rate for the EMU is at 2.9%. For Germany, it's at 3%; for France, it's at 2.6%. In Italy, the five-year compounded rate is at 2.4% while in Spain it’s at 3.1%. Much of this is because of the volatile items in the report mainly food and energy, particularly energy. If we look at the five-year compounded German ex-energy rate it is still only at 2.1%. A year ago, inflation was still at a level that was consistent with the target rate set by the European Central Bank for the whole of the euro area. Italy's five-year compounded core inflation rate is at 1.3%, still below the pace targeted for all the euro area.

The table focuses on German consumer confidence from GfK, but it also includes the most up-to-date metrics for Italy, France, and the United Kingdom. For all these countries, consumer confidence is extremely low. In the case of the German GfK measure, for which there's an advance estimate for August, the value of -30.6 is the lowest in the history of this survey. For France, the consumer confidence index at 79.5 has been lower less than 1% of the time. In the U.K., that consumer confidence measure for July has been that weak or weaker less than 1/2 of one percent of the time. In Italy, consumer confidence has been weaker 18% of the time. All of these are extremely low values for consumer confidence.

As inflation has risen globally, consumer confidence has fallen. This has created some confusion about economic performance as there also is concern about economic slowing and the potential for recession. However, what we see shows clearly that economic performance can still be pretty good even if inflation performance is very bad; and yet consumer confidence can register a very low reading in such circumstances. Perhaps the best example of this is in the United States where the unemployment rate remains near 40-year lows and where consumer spending continues to plow ahead and yet with extremely high inflation the U.S. consumer sentiment index, as measured by the University of Michigan survey, is near its historic low. Despite these conditions of low and falling unemployment and advancing consumer spending, many in the U.S. think the economy is in recession. It's confusing…

It's not possible to look at a consumer confidence number and to really know why consumers are feeling as bad as they are. Even the surveys that give detailed readings on the consumer that may allow you to extract certain elements that are particularly bad, it's always hard to know exactly what it is that is nagging at consumer expectations the most and causing the loss of confidence.

In the German survey, there are three components that are available with a one-month lag. These components refer to the reading of -27.7 for July rather than the -30.6 reading for August. However, both are quite weak numbers, and the component values ought to be relevant for what's happening in August even though these are, formally, numbers from July.

In July, economic expectations in Germany fell to a reading of -18.2 from June's -11.7. The economic index has been lower than that reading less than 10% of the time, historically. Income expectations in July fell to a -45.7 reading from June's -33.5. The income expectation rating is the lowest on record. The propensity to buy slipped to a reading of -14.5 in July from -13.7 in June; at that level, the propensity to buy has been weaker historically about 18% of the time.