Economy in Brief

U.S., Euro Area and U.K. inflation lose momentum, but U.K. inflation is the most stubborn U.K. inflation, on its CPIH measure, rose 0.6% in March, a disappointingly large increase after gaining 1% in February. Inflation in the U.K. is 8.9% over 12 months, decelerating to an 8.4% annual rate over 6 months and then trimming down to 7.2% annualized pace over 3 months. This is still very hot inflation. In addition, the core measure of inflation rose 0.5% in March after rising 0.9% in February. The progression of core inflation goes from 5.6% over 12 months, rising by 5.8% when annualized over 6 months and rising again to a pace of 6.1% over 3 months. This is exactly the wrong progression for the U.K.

U.K. comparative inflation Comparing U.K. inflation to inflation in the European Monetary Union and to the United States, the U.K. has currently the highest year-over-year inflation rate by a large margin. It also has the smallest decline in the year-over-year inflation rate when all are measured on an HICP basis. Year-on year inflation on an HICP basis in EMU is 6.9%, U.K. HICP inflation is at 10.1% and U.S. HICP-basis inflation is at 5.3% (the U.S. HICP is up to date though February). Year-on-year EMU inflation is lower by 0.6%, U.K. inflation is higher by 3% and U.S. inflation is lower by 3.6%. The U.K. is a clear laggard on inflation progress. The U.S. is making the most progress in this grouping.

U.K. inflation dynamics The U.K. inflation progress for the headline is poor and for the core, it’s in the wrong direction. Not surprisingly the diffusion statistics for U.K. inflation that measure inflations breadth across the components in the table also is poor. One year ago, the year-over-year inflation rate had accelerated from what it had been a year before in 90% of these categories. Currently, over 12 months, the 12-month inflation rate is still accelerating in 64% of the categories compared to what it was one year ago. Over 6 months, there's a break, as inflation accelerates in only 27% of the categories compared to the inflation rate over 12 months. But then, over 3 months, the trends are back to broad deterioration as diffusion is again at 64% comparing the 3-month inflation rates to inflation rates over 6 months. These statistics do not show that there is much progress in train in the U.K. Over 3 months, the inflation rates that are deteriorating compared to 6-months are for housing & household expenditures, furniture outlets, transportation (reflecting the oil price weakness), and for restaurants & hotels (where, despite decelerating, the 3-month inflation rate is still 10.7% annualized).

U.K. economy: In terms of the performance, there has been a slight tendency for the unemployment rate to increase. In January, the unemployment rate is up to 3.8%; six months prior to that it had been as low as 3.5%. The unemployment rate in the U.K. has crept higher, but it doesn't show strong signs of accelerating.

On balance: The Bank of England still has work to do. In fact, its situation is somewhat worrisome because of the acceleration that we see in core inflation. Global trends (that we will look at below) are moving in the right direction; they will provide a better environment for inflation fighting ahead. They can provide some assistance in gaining control of inflation. But the current situation in the U.K. is that (1) inflation is too high, (2) it's stubborn, or in terms of the core measure, (3) it's simply moving in the wrong direction and (4) still too high. The main burden for success falls on the BOE.

The ZEW survey by German financial experts continues to show widespread negative readings in April. The economic situation gets substantial negative readings for the euro area and Germany while the United States gets a small positive reading. Expectations for Germany are positive while expectations for the U.S. are negative. In all, the expectations and economic situation diffusion readings have weak rankings below their 50% mark, meaning that they are below their respective medians on data since 1992 – a 30-year stretch.

Nonetheless, the economic situation according to the ZEW experts improved between March and April in the euro area and Germany with readings changing from the negative mid-40s to the negative low-30s in diffusion terms. For the U.S., a positive reading of five in March gives way to a positive reading of 4.1 in April, a small setback. Expectations deteriorated month-to-month in Germany and in the U.S. on readings ranging from a ranking below the 30th percentile to below the 20th percentile.

Inflation expectations are deeply negative implying that inflation is strongly expected to fall from where it is now. The month-to-month numbers even became slightly more negative indicating that inflation progress is slightly more strongly expected. The ranking for the inflation metrics is well below the 5% level for the euro area, Germany, and the U.S. The expectation for inflation to decelerate is extremely strong.

Interest rate expectations for short-term rates moved up slightly in the euro area and moved down in the U.S. For the euro area, there's above-median reading with diffusion at 68.5 in April having moved up from 67.9 in March. In the U.S., the April reading moved down rather sharply to 44.7 from 55.3 as the ZEW experts are looking for below median rate changes compared to March. However, in both cases, the queue standing for interest rates is above the median, but much higher, at an 85.5 percentile queue standing for the euro area, compared with a 54-percentile standing in the U.S., where some are beginning to see the end game insight for the Federal Reserve.

Long-term interest rate expectations saw their month-to-month diffusion readings decline, in Germany from 28.4 in March to 21.8 in April; in the U.S., expectations fell from 18.6 in March to 9.2 in April. The queue standing for the German expectations are in their 28th percentile. For the U.S., the queue standing is in its 14th percentile. The outlook for long-term interest rates is clearly moderating.

Stock market expectations between March and April did not change very much. They stepped up in the euro area to a reading of 13 from 9.9, and also in Germany to 13.5 from 12.7. The United States’ expectations slid to 12.2 from 16.1. However, all of these are historically weak readings. The queue standings for the euro area are at its 7.2 percentile. For Germany, the standing is at its 6.6 percentile. The U.S., with a lower diffusion reading, has a stronger standing at its 24.7 percentile. The outlook for the stock markets remains subnormal and guarded.

The final metric is for the dollar against the euro and here while the reading for the U.S. dollar is still at a -6.6 in April, that's an improvement from -10.4 in March, with the queue standing at its 44.7 percentile, below its historic median but not by much. Exchange rate changes have not been much in the limelight recently.

Italy's headline inflation report, the HICP, showed that prices fell by 1.1% in March. The core measure for the HICP showed prices falling 0.3% in March. These changes came after a headline increase of 0.5% and a core increase of 1.2% in February.

The sequential percent changes in the HICP show that Italian headline inflation is moving lower. Prices are up 8% over 12 months, up at a 6% annual rate over 6 months and falling at a 4.6% annual rate over 3 months. In contrast, core inflation shows some but much less inflation progress. The core deceleration is much more moderate as prices are up by 6.8% over 12 months, they soften to gain 6.5% at an annual rate over 6 months and then slow to a 6.2% annual rate over at 3 months. For the most part, core inflation has a very, very, small deceleration built into it.

Domestic vs. HICP inflation Italy also reports out a domestic CPI; the domestic CPI for Italy fell by 0.5% in March, but the core CPI did not follow suit and was up by 0.4%. Italy's headline CPI report shows inflation falling sequentially parroting the HICP result. Headline inflation rises by 7.5% over 12 months, rises at a 6.7% annual rate over 6 months and then it falls at a 2.3% annual rate over 3 months. Core inflation for the domestic measure shows more of a decline than it does in the HICP measure. Italy's domestic core inflation is up by 6.3% over 12 months, up at a 6% annual rate over 6 months, and up at a 5.5% annual rate over 3 months. The difference between the 12-month and the 3-month inflation rate is just a little bit less than a percentage point at minus 0.8% comparing annual rates. It’s a modest pace of deceleration.

Inflation diffusion is not linear Diffusion calculations (performed on domestic CPI data) show that Italian inflation over 12 months is broadly higher than it was 12-months ago with inflation accelerating in 83.3% of the categories. However, over six months inflation accelerates in only 41.7% of the categories compared to their pace over 12 months. Over 3 months inflation accelerates in 62.5% of the categories compared to their inflation rate over 6 months. Therefore, while the inflation rates have stepped down from 12-months, to 6-months, to 3-months, diffusion calculations show that these trends are not uniform across categories and that over 3 months, despite the sharp decline in inflation compared to earlier metrics, there are a number of categories where inflation is still rising when compared to its pace of 6-months ago.