Economy in Brief

Industrial production in the euro area was flat in June, interrupting a four-month string of increases that had been in place. Despite the flatness and the decline in manufacturing output in the month, trends still show that output is on an expanding path. Consumer goods output was particularly strong in June, up 2.7% month-to-month, led by a 3% increase in nondurable goods output. However, intermediate goods output fell by 0.8%, and capital goods output fell by 1.4%. Growth is a matter for the weighting-game more than a statement about breadth.

The sequential calculations that give us a look at trend show that output is accelerating overall, barely growing at a 0.1% pace over 12 months, edging up to a 0.6% annual rate over six months, and culminating at a 2.5% annual rate over three months. Manufacturing output similarly has a slow start but builds a head of steam to grow at a 2% pace over three months. Consumer goods output ramps up very sharply. Although it declines by 0.8% over 12 months, over three months it is up at a 38.3% annual rate, led by strong expansion in consumer nondurables with output surging at a 43.9% annual rate over three months. However, consumer durable goods are still lagging, with output falling by 2.7% over 12 months, although it is rebounding at a 1.8% annual rate over three months.

The story across countries is varied with many European economies showing output declines in June. Of the 14 early-reporting European economies in June, nine showed declines in output in the month. For individual European economies, Germany and Spain are on accelerating paths, while Italy, Luxembourg, and Greece are posting decelerating output patterns.

In the quarter to date, output is rising for most industrial categories across the monetary union. The exception is consumer durables, the only category showing a decline on a quarterly basis with the second-quarter results now in. Manufacturing output is up at a 4.6% annual rate in the quarter. Consumer goods output is up to a 12.3% annual rate. Intermediate goods output is up at a 4.2% annual rate, and capital goods output is advancing at a 3.4% annual rate. Of the 14 European countries summarized in the table, Austria, Malta, Greece, and Portugal are the only countries showing quarter-to-date declines in the second quarter.

For the most part, these readings are upbeat, showing acceleration in most of the overall European manufacturing categories. However, when we evaluate annual growth rates compared to historic norms, all of the industrial categories for the monetary union are below their historic medians except for intermediate goods output. Across the European economies reporting in this table, only five have output speeds taking them above their historic medians. Those are Finland, Italy, the Netherlands, Spain, and Greece. All the rest of the reporters are below the 50% mark. The median ranking across the monetary union economies is at its 44.5 percentile.

Inflation in Italy rose 0.1% in July after being flat in June and rising 0.3% in May. The core HICP was not quite so lucky, rising 0.3% in July after declining 0.2% in June and rising 0.4% in May. The domestic inflation data from Italy show the headline rising 0.1% in July, flat in June, and rising 0.4% in May. The Italian core on its domestic measure rose 0.3% in July, was flat in June, and rose 0.3% in May.

HICP inflation has gotten unruly in Italy, rising 2.9% over 12 months, accelerating to a 5.2% annual rate over six months but then rising by only 1.6% at an annual rate over three months. Core inflation remains much better behaved but has seen some increasing pressure, rising 1.5% over 12 months, posting a 1.4% annual rate over six months, and rising at a 2% annual rate over three months.

The domestic measures of inflation show the headline is quite similar to the HICP headline, rising 2.9% over 12 months, accelerating to a 5.7% annual rate over six months, and posting a 2% annual rate over three months. The Italian core rate, however, accelerates steadily from 1.6% over 12 months to 2.2% annualized over six months and to 2.4% annualized over three months. It's not a terrible ramping up, but it is an acceleration; it takes the Italian core to a level above what the ECB projects as its target for the euro area as a whole.

Inflation diffusion in Italy over three months, six months, and 12 months is relatively well behaved at 53.8% over 12 months and over six months. There's a modest tendency to have more acceleration than deceleration; however, over three months the diffusion measure falls to 46.2%, indicating net deceleration. The net deceleration over three months is reassuring, with moderate three-month inflation rates having been posted on the various metrics cited above. However, even the slight acceleration tendencies are a little more disturbing, with the high headline inflation posted over six months and uncomfortably high near a 3% pace over 12 months.

On a quarter-to-date basis, inflation in the third quarter is off to a slow start, at 1.2% for the HICP and 1.4% for the domestic measure. Both the HICP and the domestic measures show core inflation higher at 1.8% for the HICP and at a 2.4% annual rate for the domestic metric.

The inflation problem in Italy isn't simply something that comes because of oil. Year-over-year, the headline for the HICP and the domestic measure are both under 2% in the quarter to date (QTD). But both measures are running at or above 2% in most of the sequential developments of inflation from 12 months to six months to three months. Core inflation is showing pressure for both the HICP and domestic measures sequentially as well as QTD. The Italian inflation report for July by itself is not so good as the monthly headline is well-behaved, but the cores are uncomfortable in both the HICP and domestic measures. Inflation clearly is not dead. It remains something to keep an eye on even in Italy where inflation trends had been better behaved.