Economy in Brief

Portugal’s inflation data trends paint a mixed picture if looked at strictly. However, looked at more broadly, it is clear that the minor inflation backtracking is the exception while inflation falling and behaving is the rule.

Portugal’s HICP index in January rose by 0.5% month-to-month after being flat in December and falling 0.3% in November. Portugal’s national CPI also rose relatively sharply on the month, gaining 0.6% month-to-month in January after rising by 0.1% in December and being flat in November. The core rate in the national CPI rose by just 0.2% in January, the same as December, compared to a November performance that was flat month-to-month.

Inflation trends The overall HICP measure shows inflation decelerating despite the month’s jump. Twelve-month inflation is up 2.6%, over six months it rises by 1.9%, and over three months the inflation rate is at a 1.0% rate. The national CPI is more equivocal, rising by 2.3% over 12 months, accelerating to a 2.9% pace over six months, and settling at a 2.8% annual rate over three months. Despite that slight acceleration and stickiness for the headline, the core for the national CPI shows clear deceleration from a 2.4% gain over 12 months, to 1.7% at annual rate over six months, to a 1.4% annual rate over three months. On balance, inflation trends in Portugal seem to be in good shape and not only are the three-month and six-month inflation rates homing in on the ECB's target, but the 12-month inflation rates also are only a stone’s throw from the target set for the euro zone established by the European Central Bank.

Inflation acceleration/deceleration Inflation diffusion in January shows month-to-month inflation across categories accelerating in half of them, the same as in December. Despite the weaker November headline performance, inflation accelerated in 58% of the categories in November.

Looking at inflation acceleration trends sequentially on broader periods, we have a much more satisfying result. Over 12 months inflation accelerates in 25% of the categories, while over six months inflation accelerates in 41.7% of the categories. That's a step up in the proportion accelerating but still less than 50% of them. And over three months, inflation is back to accelerating in only 25% of the categories. All of this is descriptive of an inflation rate that is coming to heel and doing so consistently.

Price declines Looking at the 12 categories in the national CPI rate in January, six of them showed declines in prices month-to-month; that compares to only two that declined month-to-month in December and seven that showed month-to-month declines in November.

The broader sequential data show prices declining over three months in six of the categories; over six months, prices decline in four categories; over 12 months prices decline in only two categories.

It's not that surprising to see fewer price declines over 12 months than over three months because the shorter-term data are intrinsically more volatile. However, there's also a powerful sense of trend here in which inflation is behaving and part of that behavior has prices not just decelerating but declining. Over three months there has been a double-digit decline in prices measured at an annual rate for clothing & footwear. There is a decline of 2.7% at an annual rate for household furnishings and a decline of 2% at an annual rate for transportation as well as a 1.9% drop at an annual rate for recreation & culture. Inflation is falling at a 1.6% annual rate for alcoholic beverages & tobacco.

German inflation falls- German inflation fell in January with the HICP headline falling in the month, logging a decline of 0.1% in January after spurting by 0.6% in December. The core HICP wave accelerated to 0.3% in January from 0.2% in December.

German inflation rises- The German domestic CPI inflation measure accelerated to 0.4% in January from a 0% performance in December; the CPI ex-energy rose by 0.3% after rising 0.2% in December.

What really matters in how it’s trending, not its month-to-month gyrations- What you conclude about inflation depends a lot on how you tend to look at it. The year-over-year HICP rose by 3.1% in January, down sharply from its 3.8% pace in December. But then, in November, inflation had been up by only 2.2% so the path for German headline HICP inflation is somewhat jagged. Core inflation that tends to be more stable rose by 3.7% year-over-year in January compared to a 3.7% increase in December. That’s stable, but both of those are down from where inflation had been which is 4% in November, 4.9% in October, and 5.5% in September; that compares to 6.9% in August and a rate of more than 7% in June and July of 2023. Clearly inflation is and has decelerated in the big picture. Core inflation, which does a better job of nailing down the sustainable trend, has flattened out over the last two months. More broadly, a core measure shows German inflation has come down quickly and is hovering in a much lower range than it was in 2023. But at 3.7%, inflation in Germany is still a far cry from the 2% target that the European Central Bank has for the euro area.

Shorter periods show lower HICP inflation- Of course, the German data also show a lot more inflation behaving if we measure inflation over shorter periods. For example, the HICP inflation rate expands by 3.1% over 12 months, at a 1.9% annual rate over six months, and at a 2.5% annual rate over three months. The core HICP rises by 3.7% year-over-year, by 2.1% at an annual rate over six months, and then takes up to a 2.3% annual rate over three months. Inflation is not sequentially deteriorating, but it clearly is on its way lower as the three-month inflation rates for the headline and the core are both markedly below their year-over-year pace. That's a strong score for the concept of inflation unwinding.

Domestic prices are even better- The domestic CPI, the headline shows clearer deceleration from 2.9% over 12 months, to a 2.2% annual rate over six months, to a 1.4% annual rate over three months. The CPI excluding energy on the domestic measure rises 3.4% over 12 months, at a 2.8% annual rate over six months, then steps down to a 2.5% annual rate over three months. The domestic gauge shows inflation much more clearly decelerating and the deceleration takes the inflation pace to a much lower and more benign rate. The headline on a three-month basis is already below the target for the ECB and the six-month pace for inflation is within a stone’s throw of it while for the CPI excluding energy the 2% target is getting in range.

Monthly breadth- Diffusion indexes for inflation measure the breadth of inflation: is inflation accelerating (breadth>50%), or decelerating (diffusion<50%). In January and in December inflation diffusion is over 63%, implying that inflation is accelerating in more categories than it's decelerating. However, the January and December results come after November; in November inflation did not accelerate in any categories! Diffusion was zero so there was a broad slowdown for inflation in November and then a rebound in December and in January.

Sequential inflation breadth- Sequentially inflation diffusion is better behaved over broader periods. Over 12 months diffusion is 27%, over six months it's 36%, and over three months it's back to 27%. On all these horizons, 12-month, six-month, and three-month, inflation is clearly decelerating compared to the period before. In the case of these statistics, we compare 12-month inflation to inflation one-year ago; six-month inflation is compared to 12-month inflation; three-month inflation compares to six-month inflation. Note that the deceleration of inflation is made off the domestic report where both headline and core inflation rates are showing sequential inflation falling.

Japan's economy watchers current index fell to 50.2 in January from a level of 51.8 in December; its queue standing is in its 70.4 percentile, still well above its historic median that occurs at a rank of 50% but more in the range of readings that are indicating relatively firm economic activity.

In contrast, the economy watchers future index rose to 52.5 in January from 50.4 in December. The future index has an 83.8 percentile standing, considerably stronger in ranking than the current index and more clearly at a standing level that indicates more strength.

The Current Index The index showed a decline in the headline as well as declines in six components of the index. The reading for households fell, the reading for the retailing sector fell, the reading for eating and drinking places fell – and fell relatively sharply, the reading for services fell, and the reading for corporations, generally, fell led by a decline in the assessment of nonmanufacturing corporations.

Among the various entries under the current index, the strongest, despite the sharp drop in January, is the 86.6 percentile standing for eating and drinking places, followed by an 80.6 percentile standing for manufacturers. In the case of manufacturers, this likely is the result for Japanese firms benefiting from what has been a chronically weak yen at a time that international activity has begun to strengthen in a number of places. The U.S. economy continues to show stronger growth and the U.S. is Japan's second largest trading partner. However, Japan's largest trading partner is China, and that economy is struggling. The weakest ranking in the current index is for employment; it has a 47.8 percentile standing, leaving it below its historic median; however, the diffusion index still has a reading at 53.3 that improved month-to-month and continues to indicate employment is expanding. While the employment metric is the weakest current reading, housing is in second place at a 59.7 percentile standing.

The Future Index Japan's future index is quite solid with a headline standing at its 83.8 percentile. Three of its components have rankings in their 90th percentile or higher: one is for households at the 90.1 percentile, another is for eating and drinking places at the 98.4 percentile, and a third is for services at the 92.1 percentile. Only one category weakened month-to-month; that was services. It weakened to a diffusion reading of 54.9 in January from 55.2 in December but continues to have a percentile standing in its 90th percentile at 92.1. The weakest future reading is the same as in the current indexes- employment. Employment in the future framework has a 53.8 percentile standing, only modestly above its historic median. The monthly future reading for employment stands at 53.2, up from 52.9 in December.

Momentum Current- The current index shows weaker increases over 12 months than what occurred over 12 months one year ago; that's true up and down the line for components as well as the headline apart from manufacturing that shows a gain. Only retailing shows a decline in diffusion compared with the level of one year ago. Over six months, seven of the categories plus the headline show declines in value. Over three months, five categories plus the headline show declines in their surveyed diffusion indexes. The current index clearly has been losing momentum for a while.

Future- The future index also shows smaller increases over 12 months than it logged over the previous 12 months for all categories except for eating and drinking places, manufacturers, and for employment. Each of those 3 categories show a step up in 12-month changes compared to what they had reported one year ago. Over six months, changes are weaker than they are over 12 months for most components; all components are weaker on balance over six months including the headline except for manufacturers. The manufacturers’ future reading shows persistent acceleration over three months and over six months as well as over 12 months (compared to 12 months ago). The headline reading over three months in the future index shows broad-based increases; these increases are larger than the changes posted over six months for the most part. There is only one exception to that and that's housing; it is weaker on balance over three months.