Economy in Brief

Spain’s harmonized inflation on the euro area measure rose 1.1% in February, accelerating from a 1% gain in January after logging ‘no change’ in December. The inflation picture in February and over three months largely shows inflation pressures are lingering and remain relatively intense. However, the broad sequential path of inflation has been interrupted and does not show clear acceleration although there still is clearly pressure.

The HICP is still hot Spain's inflation over 12 months shows a gain in the HICP of 6%; over six months the rate of increase is only at 2.5% pace; however, over three months the annual rate is up to 8.3%, a sharp gain. Inflation has not only accelerated over three months, but the pace of the advance exceeds the 12-month pace of a year ago when the 12-month inflation rate was 7.7%. The three-month pace is still above that as well as the current 12-month pace.

Spain’s ex-energy gauge is accelerating Spain’s domestic measure of inflation rose by 1.1% in February, up from 0.7% in January and 0.1% in December. The Spanish domestic CPI excluding energy rose 0.7% in February, less than the 1.2% gain in January but the same as the 0.7% increase in December. The sequential path of inflation in Spain shows the headline running at 6.1% over 12 months, then slowing to a 2.5% pace over six months, before speeding up to a 7.9% annual rate over three months. The ex-energy inflation rate is up by 7.6% over 12 months, ticking higher to 7.7% over six months, then accelerating further to a 10.8% annual rate over three months.

Inflation’s breadth confirms its presence The table also offers a view on inflation diffusion over three months, six months, and 12 months. These metrics show that over 12 months inflation accelerates in 72.7% of the categories. Over six months that falls back to 45.5%, slightly less than half of the categories show a step up. However, over three months inflation is back to accelerating in 72.7% of the categories again. Spain continues to have an issue with inflation accelerating. The acceleration is present not only in the headline measure which shows a clear step up and reflation over three months compared to six months. The ex-energy measure shows the steadier acceleration from 12-months, to six-months, to three-months with a significant jump in three-months compared to six-months as inflation remains broadly felt.

Japan’s Ministry of Finance (MOF) business outlook survey for Q1 2023 showed a relatively sharp drop to -3 for all enterprises from +0.7 in the fourth quarter. The bellwether manufacturing index fell to -10.5 in Q1 2023 from -3.6 in the fourth quarter, while the nonmanufacturing index dropped to 0.6 from 2.7 in the fourth quarter.

For medium-sized companies, the manufacturing index plunged to a reading of -17.2 in Q1 2023 from -3.9 in the fourth quarter. For small enterprises, the manufacturing index plummeted to -23.9 in the first quarter from -4.2 in the fourth quarter.

The assessments of activity for enterprises of all sizes were cut back and cut back relatively sharply. The biggest declines were among the medium and small-sized enterprises in manufacturing.

The changes for the quarter-ahead also revealed losses that were relatively sharp although they were better balanced across enterprises of different sizes. For one quarter-ahead, large enterprise manufacturers cut their outlook by 13 points, medium sized enterprises cut their outlook by 13.3 points while small enterprises in manufacturing cut their outlook by 10.4 points. Nonmanufacturing enterprises cut their outlook for the quarter-ahead by 2.7 points for large enterprises, by 4-points for medium-sized enterprises, and by 1.4 points for small enterprises.

Looking ahead by two quarters, we continue to see reductions in the outlook compared to the outlook that was made one quarter ago. And here the outlooks are once again progressive with the smaller firms cutting their outlooks more. Manufacturing large enterprises cut their outlook two quarters ahead by 4.8 points compared to a reduction of -7.9 points from medium-sized enterprises and a cut of -9.4 points for small enterprises. For nonmanufacturers, large enterprises cut their outlook by -0.3 points, a medium-sized enterprises cut theirs by -3.4 points and small enterprises cut theirs by -5.4 points.

Absolute assessments I also construct ranking statistics in the table to compare the standings of establishments of different sizes, and also to facilitate comparison between current, quarter-ahead and two quarter-ahead assessments. Among all enterprises in the current quarter the assessment stands at its 27th percentile, below the 29.7 percentile standing for the quarter-ahead and the 33.8 percentile standing for two quarters ahead. Large enterprises in manufacturing have only a 13.5 percentile standing, the quarter ahead standing is worse at the 11th percentile while the two-quarter ahead assessment has a 27th percentile standing. Nonmanufacturers that are large enterprises have a 41.9 percentile standing compared to a 29.7 percentile standing for the quarter-ahead and a 47.3 percentile standing for two quarters ahead. The rule we find here is that the two quarter-ahead standing is generally better than the current quarter standing for large and medium enterprises; however, for small enterprises the two-quarter ahead standing is lower than the current quarter standing; that could be because the current quarter standing for smaller enterprises is a relatively stronger standing than the current quarter metrics for large enterprises.

German inflation continued to run hot in February. The HICP gain in the month of 0.6% was stronger than January's 0.4% while the core rate accelerated to 0.7% from January's 0.3%.

Overview- Germany logs a year-on-year HICP gain of 9.2% in February which is stronger than January's 9.1% but lower than its string of increases from September to December of last year; a string in which the German headline year-on-year inflation rate peaked out at 11.5%. The core year-over-year rate of 7.4% in February is a sharper rise than its 7.0% year-on-year increase in January. That marks a new cycle high for the annual core inflation rate! That's certainly not a good development for inflation prospects in Germany.

HICP some deceleration some mixed performance- However, because of a slowdown and, in fact, the decline in the headline month-to-month HICP in December, Germany's headline inflation rate shows deceleration in its broader sequential trends. Its 9.2% gain over 12 months softens to 8.9% over 6 months, and over 3 months the annual rate increase is at just 1.6%. The core rate is a bit less cooperative with a 7.4% gain over 12 months rising to an 8.7% gain over 6 months but edging down to a 5.9% annual rate over 3 months.

CPI excluding energy- Germany's domestic CPI measure shows a similar deceleration in the headline. But for the CPI excluding energy the German domestic CPI shows a year-over-year gain of 7.6%, rising to 8.3% over 6 months and then falling back only to a 7.1% annual rate over 3 months. That 3-month pace for the CPI excluding energy is below the 12-month pace, but the 7.1% compared to 7.6% is still not much progress and still a very high rate of inflation for an ex-energy measure.

Diffusion of inflation monthly- On balance, the German headline and core trends are not very encouraging this month. Looking at the diffusion that measures the tendency for inflation to accelerate, there was a great step down in December where diffusion fell to only 9% which means 91% of the categories were showing inflation decelerated in December compared to November. in January diffusion stepped up to 36% and in February it stepped up again to 45%. But both these gauges show that inflation is accelerating month-to-month and in fewer than half of the categories. These calculations do not use any weighting.

Sequential diffusion- Sequentially the diffusion indexes show that inflation is accelerating over 12 months compared to 12-months ago in about 82% of the categories. Over 6 months inflation is accelerating compared to its 12-month pace in about 64% of the categories. Over 3 months inflation has accelerated in only about 45.5% of the categories. Still 45.5% is not that decisively below the break-even which is at 50%. Diffusion trends are somewhat encouraging but given the height of inflation I would mark them as still inadequate.

Oil prices- Underlying a lot of what's going on with inflation is oil prices and we have Brent prices denominated in euros memorialized at the bottom of the table. Brent prices are down compared to a year ago by 5.9%, they're down over 6 months at a 34% annualized rate, and they're down over 3 months at a 42% pace. Monthly data show Brent prices fell by 13.6% in December, they rose month-to-month by 1.4% in January and then they fell by just 0.3% in February. The help on inflation reduction that's been coming from oil prices appears to be diminishing substantially for Germany. Meanwhile, inflation diffusion while showing some deceleration is not showing very impressive results.