Economy in Brief: 2022

The euro area total PPI rose by 5.1% in August after rising 3.6% in July. Sequential growth rates continue to run very hot: the three-month growth rate at 49.7% annualized, the six-month growth at 45.3% annualized and the year-over-year growth rate at 43.4% annualized. All are very hot. They compare to a year ago, when the year-over-year growth rate was 13.6%, which is much lower but still considerably higher than what would be construed as consistent with price stability.

Monthly results Components show capital goods prices rose by 0.5% in August, slower than the 0.7% rise in July. Consumer goods prices rose by 0.9% in August, lower than the 1.2% increase in July. Intermediate goods prices were flat for the second month in a row. Manufactured goods prices altogether fell by 0.3% in August and by 0.5% in July.

Sequential trends Sequential prices show capital goods inflation decelerating slightly from 7.8% pace year-over-year to a 6.5% pace over three months although there was an intervening acceleration over six months. Consumer goods prices also show some slight deceleration falling to a 12.5% annual rate over three months after a 14% year-over-year rise, although there too, there's an acceleration to nearly 19% over six months. Intermediate goods prices clearly slow down: the year-over-year increase is 19.9%, over six month the increase is 19.3%, the three-month increase is small at 2.2%, a clear deceleration for intermediate goods inflation. Manufacturing prices also slowed down overall from a 17.4% pace over 12 months to an 18.4% pace over six months to a 3.1% annualized pace over three months. What we see is some evidence of sticky inflation especially for consumer goods but deceleration is concentrated in the intermediate goods area.

That's not surprising because of energy prices weakening. Brent oil prices have fallen, they are falling over three months at a 42% annual rate, this compares to a 7% annual rate increase over six months and the 38% increase over 12 months. However, Brent had been going up previously and one year ago Brent was up by 56% over 12 months. The impact of Brent prices on the PPI lags and that means there should be more inflation good news ahead.

Sequential statistics on inflation acceleration reveal that only 15% of countries show acceleration over three months. 46% show increases over six months while all countries show an increase over 12 months. While the weighted individual component data don't show the decelerations as clearly, the diffusion treatment does appear to be a countrywide phenomenon. And for the time being, it's concentrated in intermediate goods, not as prevalent for capital goods or consumer goods.

Japan’s Tankan in the third quarter slipped to +8 from a reading of +9 in the second quarter. The headline most closely followed by Japanese investors and economists is the reading for large manufacturing firms. That index had previously slipped from 14 in the first quarter of 2022 to +9 in the second quarter; the third quarter extends this trend slippage that dates to peak readings of +18 in the third and fourth quarters of 2021. On data back to 2004, the manufacturing reading for the third quarter has a 48.5-percentile standing, putting it just below its median on that timeline.

By comparison, the nonmanufacturing reading rose to 14 in the third quarter from 13 in the second quarter; it had been as low as +9 in the first quarter of 2022, the same level as in the fourth quarter of 2021. The nonmanufacturing trend has been on an improving run while manufacturing has been under deteriorating run in Japan. The nonmanufacturing sector has a 51.5 percentile standing on data back to 2004, slightly above its historic median.

Looking across sectors in the report the nonmanufacturing area shows some significant industry improvements. Within nonmanufacturing, in construction and real estate there are monthly improvements. Improvement in wholesaling is modest on the month. There is substantial improvement in transportation, a slight improvement in services for businesses and a slight improvement in restaurants & hotels that still have a net negative reading but showed less of a negative reading in the third quarter. Deteriorating sharply quarter-to-quarter were personal services that fell from a +18 in Q2 to a +2 reading in Q3; however, that had been a negative reading in the previous two quarters (Q4 2021 and Q1 2022). Also weakening in the quarter is retailing; that industry fell to a reading of +3 in Q3 from +7 in Q2: it had only been at +2 in the first quarter and was at +3 in Q4 2021, so this is a return to retailing roots around the turn of the year.

On the positive side, construction and real estate both have 51.5 percentile standings over this period. Transportation has a 60.6 percentile standing; services for businesses have a 78.8 percentile standing, with wholesaling at an 87.9 percentile standing. Below median readings exist in retailing, restaurants & hotels, and personal services.

Medium-sized enterprises The Tankan also extends to smaller companies although these readings are not considered to be critical as bellwethers in this survey. However, for medium-sized manufacturing firms the Tankan in the third quarter was zero, the same as in the second quarter, down from stronger first quarter and fourth quarter readings. At the zero-percentile mark, the medium firm manufacturing standing is at the 33.8 percentile mark. Nonmanufacturing, however, has been improving for medium sized companies, moving up to a +7 reading in the third quarter from +6 in the second quarter and zero in the first quarter of 2022. Nonmanufacturing has a 60.8 percentile standing. The outlook for manufacturing for medium-sized companies slipped to -4 in Q4 2022 from -3 in Q3; that compares to a +1 reading in Q2. The standing for this reading is in its 33rd percentile- a weak reading in historic context. Nonmanufacturing showed an improvement in the outlook to +2 in Q4 from +1 in Q3 compared to -3 in Q2; it has an above median, 53.3 percentile standing.

Small enterprises Small enterprises also are surveyed. Small manufacturing firms registered another -4 net Tankan reading in Q3 2022, for the third quarter in a row. Their standing is in their 46.7 percentile of their historic queue of data. Nonmanufacturing for small enterprises improved to +2 in Q3 from -1 in Q2 and -6 in Q1. Nonmanufacturing has a queue standing that is firm at the 73.3 percentile mark. The outlook for manufacturing stayed at -5 for small manufacturing enterprises in Q4 2022, the same as in Q3 and Q2. This reading, however, has a 52-percentile standing; it is still above its median. Nonmanufacturing saw an improvement in the outlook to -3 in Q4 2022 from -5 in Q3; it previously was -10 in Q2, and the Q3 reading has a 69.3-percentile standing in its historic queue of data.