Economy in Brief

Manufacturing PMIs continue to show an uptrend in place. The median estimate for the 18 early reporting countries of manufacturing data is 51.6. It shows expansion at a relatively weak pace, with a slight month-to-month backtracking in the overall median reading for the 18 countries. That median fell by 0.8 points month-to-month. However, the broader readings over three months, six months, and 12 months each are above 50, and each of them shows an increase compared to the previous period. So, while there was a minor monthly setback, the overall reading shows conditions are broadly improving, and output is advancing, in manufacturing. Over a longer time horizon, changes over three months, six months and 12 months are on an improving path.

Diffusion statistics that show that proportion of readings that are getting better reveal a split of 50/50 month-to-month. However, over three months, 66.7% of reporters are improving; over six months compared to 12 months, 72.2% are improving; and over 12 months compared to a year ago, 77.8% are improving. Momentum remains in an upward direction over various horizons even in the face of month-to-month volatility in readings.

The bottom of the table shows grouped results for different batches of countries. The developed country group—the U.S., the U.K., the European Monetary Union, Canada, and Japan—show an improvement over 12 months, six months, and three months. The Asian average shows the same conditions holds with continued improvements in train. However, the BRIC countries show more stasis, with their PMI readings not clearly advancing and hovering just short of an average value of 51 on their pooled diffusion gauge.

The ranked percentile standings have made a great deal of progress over recent months. Currently, the median standing of the full-period medians for the 18 countries in the table shows an 84.7 percentile standing, which is quite impressive. Only five countries—Russia, India, Brazil, Indonesia, and Mexico—have ranked standings below their medians on data back to 2022.

The PMIs remain relatively upbeat this month despite the ongoing war in Ukraine and in the Middle East, and the constraint on traffic through the Strait of Hormuz. The manufacturing sector is showing surprising resiliency in the face of these hurdles for data up to date through May.

In the post-COVID cycle, inflation in Italy hit its low point early in 2023 and then again late in 2024. However, for the other large monetary union economies, France, for example, inflation hit its low point early in 2026 at a pace of about 1.1%. Germany, the traditional low-inflation country in the monetary union, has had more difficult times with inflation post-COVID. For this reason, the low point for German inflation came early in 2026 (and in mid-2025 at 1.9%). For France and Italy, headline inflation began escalating very early in 2026. For Germany, the escalation was a little later, and the spiky part of inflation was blunted on the early side; inflation has actually tipped slightly lower now, in May. However, despite these differences in timing, the overpowering sense is that inflation in the large countries has turned higher early in the year, and the European Central Bank will have some decisions to make.

Month-to-month price changes In May, inflation decelerated in Germany, with the month-to-month observation going unchanged. Headline prices in Spain rose by 0.2%, in France by 0.3%, and in Italy by 0.4%. German prices excluding energy have been making steady gains for the last several months, rising by 0.2% in May; Italian core prices rose by 0.4% after being flat in April and declining sharply in March; in Spain, the core CPI rose by 0.2% for the second month in a row.

The monthly statistics on inflation from the headlines and core rates for these countries are not off-the-charts or particularly troublesome. However, when put in context in terms of 3-month, 6-month, and 12-month inflation rates, the headlines and the cores trace more disturbing patterns.

Sequential trends in the HICPs Headline inflation for these countries shows over three months that inflation has a rate excessive relative to the ECB's target for the European Monetary Union as a whole. There are no country-by-country targets from the ECB, only an objective for the union-wide result. German inflation over three months is the weakest, as it logs a 4% annual rate. Italian inflation is the strongest, rising at an 8.6% annual rate. Over six months, inflation is excessive in all four of these countries. The weakest gain is in Germany at 2.4% at an annual rate; the strongest is in Italy at a 5.9% annual rate. Over 12 months, inflation is also excessive across the board relative to the ECB's overall monetary union target of 2%. The weakest gain in 12-month inflation is Germany at 2.6%, while the strongest is Spain at 3.6%. Additionally, inflation is accelerating from 12-months to six-months to three-months in both France and Italy. Although inflation is not accelerating in that three-period sequence for Germany and Spain, it is not far from doing so. All of these are going to be uncomfortable metrics for the European Central Bank to navigate. These are the headline rates for the large EMU countries, and they are clearly being pushed up by energy prices on the constriction of traffic through the Strait of Hormuz.

Core and ex-energy inflation trends Three of the four largest EMU economies give us either core inflation or inflation excluding energy metrics. On that basis, two of three economies, Germany and Spain, show excessive inflation over three months annualized, at 2.7% for Germany and 3.4%, for Spain. We compare them to the target set by the ECB for the European Union overall. Italy is the exception, with core inflation falling 0.4% at an annual rate over three months. Over six months, Germany, Italy, and Spain all have core inflation rates at or above 2%. Italy's rate comes in at 2%, Germany's ex-energy rate is at 2.2% annualized, while Spain’s CPI core checks in at 3% inflation. Over 12 months, inflation in Germany excluding energy is 2.3%, in Spain the CPI core runs 2.9%, while in Italy, inflation is still restrained for the core measure at a 1.8% annual rate.

Headline inflation and rising energy prices clearly are generating pressures such that even the core conditions aren't looking good. Core inflation rates above 3%, as we see in Spain across nearly all three timelines, are disturbing to the monetary authority. German inflation is moderate at 2.2% over six months and 2.3% over 12 months, but then it rises to a more disturbing 2.7% over three months. So far, Italian inflation is not an issue, at 1.8% over 12 months, 2% over six months, and even declining at a 0.4% annual rate over three months.