Economy in Brief

EMU inflation (month-to-month annualized) advanced at a 7.5% annual rate in August, up from a 5.7% pace in July. The year-on-year pace is at 4.2%. Countries showing the year-on-year pace of inflation faster than the overall EMU pace monthly are France, Germany, Italy, Portugal, and Ireland.

Inflation HAS broadly decelerated Inflation broadly decelerates over 12 months compared to its pace of 12-months ago. Every country in the table shows deceleration on this basis. The deceleration of inflation on this basis is -5.7 percentage points for the EMU overall; the median deceleration across members in the table is -6.1 percentage points. The greatest deceleration on this timeline is the -16.5 percentage-point drop off in the Netherlands, followed by a -11.1 percentage-point drop in Belgium, and a -10.5 percentage-point drop in Greece.

Compared to a year ago, the drop of in inflation is terrifically large. But that now seems to be a trend of the past that is withering.

The road ahead has more twists and turns Economists warn that the hard part of inflation reduction lies ahead. When oil prices fall, they can unwind inflation substantially, broadly, and quickly. But once inflation has been high for a while, other prices begin to trend with it and the higher inflation rate becomes entrenched. A dropping inflation rate is good news; however, at some point, the pace of inflation needs to be the focus rather than just the change in the pace. The focus on other prices that become sticky if inflation lingers too high for too long, is usually a spotlight on wages, since labor seeks to get back the compensation it loses when inflation rises. So, wage gains rise at a faster pace and then policy is pushing to reduce both wage and price inflation.

Inflation progress is slowing…down…does anyone care? Over six months, prices decelerate in the EMU by -0.9% at an annual rate compared to their 12-month pace. But deceleration only occurs for five of the twelve economies in the table (the EMU pace represents all EMU countries and is formed using weights reflecting the size of member economies). The median deceleration for 6-months compared to 12-months for reporting members in the table is not for a deceleration at all but for an acceleration of 2.7 percentage points.

Over 3 months, EMU inflation rises to 5.2% annualized from 3.3% over six months, an acceleration of 1.9 percentage points. Among table members, there is, nonetheless, an average deceleration of 0.3 percentage points (annualized). That would become 1.2 percentage points if the pace held for one year. Over 3 months, six of twelve members show deceleration.

Industrial output and manufacturing output as well as sector detail for the European Monetary Union in July revealing drop in overall output and in manufacturing output, spurred by sharp declines in consumer durables and capital goods output weakness. Consumer nondurables show an increase in output of 0.4% in July while intermediate goods output is higher by 0.2% month-to-month in July. There is minor growth month-to-month in intermediate goods and nondurable goods, but that fails to offset the sharp drops in consumer durables and capital goods output.

Sequential trends are not reassuring Sequential growth rates from 12-months to six-months to three-months show manufacturing output falling by 1.7% over 12 months, falling at a 6.2% annual rate over six months, and falling at a 4.4% annual rate over three months. Output falls over each of these horizons, but it's not getting progressively worse although it still falls faster over three months than it does over 12 months. Consumer goods output follows this same pattern with the declines on all three horizons and no sign of progressive deterioration but still with output over three months weaker than the output decline over 12 months. Within consumer goods, however, consumer durables output shows progressive deterioration with a drop of 6.9% over 12 months bested by a drop at an 8.7% annual rate over six months that then worsens to -14% at an annual rate over three months. In contrast, consumer nondurables output also declines on all three horizons but falls at just a 0.5% annual rate over 12 months, then declines much more sharply at a 6.9% annual rate over six months but then trims its fall to just a 0.4% annual rate over three months - slightly less then its pace of decline over 12 months. Intermediate goods output falls on all horizons, but the drops become progressively smaller as there's a 5% drop over 12 months, a 2.8% annual rate drop over six months, and a 1.6% annual rate drop over three months. Capital goods output shows an increase year-over-year, but that gives way to progressive deterioration in growth rates as its 2.6% output gain over 12 months collapses to a 5.4% annual rate decline over six months, and that worsens to a 7.7% annual rate decline over three months.

Quarter-to-date growth On a quarter-to-date basis (July relative to the Q2 average for output) overall production and output in manufacturing drop at annualized rates of 5% and 8.5%, respectively. Declines occur in each of the sectors and in each of the consumer goods subsectors. The sharpest decline in output in the quarter is from consumer durable goods, declining at a 15.9% annual rate; that drop is followed closely by a decline at a 14.7% annual rate in capital goods output.

Output compared to its pre-Covid level Taking a longer perspective… looking at output compared to where it was in January 2020 before COVID struck, both manufacturing and industrial output are higher on balance by 1% for overall output and by 1.3% for manufacturing output. Consumer goods output is higher by 6% on that comparison, consumer nondurables output is higher by 6.1%, and capital goods output is higher by 6.7%. However, consumer durable goods output is lower by 2.3% and intermediate goods output is lower by 4.5% on that timeline.