Economy in Brief: 2022

The French statistical agency has released its preliminary HICP estimate for August; the month shows a flat inflation performance compared to July. Unfortunately, August shows only the observation on French inflation for the headline. We really can't dig into the details on why things changed that much in August compared to July. However, the headline shows the 12-month inflation rate in August dipped to 6.5% from July's 6.8%. For France in August the year-on-year inflation rate is decelerating. And the gain of 6.5% year-over-year in compares to a 2.4% pace in August one year ago. While inflation was excessive a year ago, it was excessive in a moderate sense. This makes it clear that the overshoot from inflation is really a recent phenomenon with these very high inflation rates reflecting events mostly over the last 12 months. Sequentially inflation now shows a 6.5% pace over 12 months, a 7.6% pace over six months and a lower 5.7% pace over three months. That is the new August profile.

Trends as of July The rest of the table concerns how French inflation looks at the up-to-date statistics through July and earlier. In July, the core rate had increased by 0.8% from June's 0.2%, an acceleration even as the headline had cooled to a 0.5% July gain compared to 0.8% in June.

The sequential calculations on the HICP core show inflation have accelerated from a 4.3% pace over 12 months to 5.8% over six months to 6.2% over three months. On that same timeline, the CPI excluding energy for France accelerated from 4% over 12 months to 5.4% over six months to 5.6% over three months-roughly like the core path in the HICP framework. The CPI headline for France is on the same time dimension in the other data in the table, except of course for the headline of the HICP.

The headline of the CPI shows both acceleration and the deceleration. The 6% annual gain over 12 months accelerates to 8.4% over six months then it decelerates to 7.5% over three months. This, of course, is a contrary pattern to both core measures both of which are in the same timeline as the CPI headline.

The French domestic CPI could be translating the recent weakness in Brent oil prices into a somewhat slower headline gains for the CPI. Brent prices have decelerated over the three months ended in July, rising only at a 12.8% annual rate after rising at a 72% annual rate over six months and at a 61% annual rate over 12 months. In fact, in July the month-to-month change in the price of Brent expressed in euros fell by 10.8%. One thing all central banks are looking forward to is getting some relief on their inflation from what has been weakening energy prices even though the longer-run outlook for energy remains quite difficult as many countries have stuck to their ‘Green agendas' despite the pain of it. In the euro area, there is added concern about energy supplies let alone price.

In the most recent month for which we have detailed data (i.e., July 2022), we see declines in three categories among the 11 detailed and the CPI report. Prices fall month-to-month for healthcare, transportation, and communications. Healthcare prices have been weak for some time in France; they fell by 0.6% over the last year and in the previous 12-month period they had fallen by 1.7%. This is a structural change in healthcare prices. Transportation prices fell by 0.4% in July after rising by 3.3% in June; they have been ramping up at a double-digit pace over three months, six months and 12 months because of the contribution to energy costs from rising energy prices. Communication goods include a lot of technology. Technology alone helps to moderate communications prices; those prices are up by 0.1% over 12 months and up by 1.9% in the previous 12 months. In addition to their fall in July, communication prices were flat in June.

France saw some inflation pressures too. Month-to-month inflation for restaurant & hotel prices rose by 1.8% in July after rising 0.4% in June. Food prices are still strong rising at 1.3% month-to-month after June's 1.3% rise. Food price gains are still in double digits over three months and accelerating. Restaurant & hotel prices are also in double digits over three months and six months, and they also are accelerating. This reflects the return by consumers to the restaurant and hotel sector after COVID had essentially redlined that sector for a prolonged period.

Japan's leading economic index for June was at 100.9, down slightly from May's value of 101.2. The index has been waffling and in a sideways motion (see Chart) since early-2021. The growth rates show a 12-month growth rate of minus 2.5%, a six-month annualized decline of 3.8%, and a three-month annualized increase of 0.4%. Over 24 months, there's an increase of 21.9%- not annualized.

The LEI report still has two components missing for June, the loan/deposit ratio change and the normalized overtime in manufacturing metric. Only four of the six components are up to date in June. While they call this statistic a 'leading indicator,' it is working off data from May and June and here we are just a few days from September.

Monthly changes Share prices moved slightly lower in June compared to May, falling by a skinny one tenth of a percentage point. The interest rate spread was unchanged in June holding at 100.2. The dwellings-started metric is also unchanged at 100.3. The export-import balance shows a slight improvement to 99.9 in June from 99.8 in May. The April to May shift in the two lagging components finds the loan-to-deposit ratio a tick higher and manufacturing OT (overtime) unchanged.

Overall, the LEI and its components paint a picture of a Japanese economy that is very little changed on several of fronts. The biggest change in the economy has been the ongoing decline in the yen because of monetary policy in the United States. U.S. monetary policy has been moving rates up sharply and progressively; that has had a substantial impact on the dollar that has been moving up against all major world currencies especially against the yen and the euro. At some point, Japan should reap some benefits in terms of export growth although it's going to cost Japan in terms of import prices and that becomes more of a problem because as Japan does import a lot of energy that is priced in world markets in dollar terms. However, Japan is taking steps to revive its previously mothballed nuclear facilities to reduce its dependence on imported hydrocarbons.

Trends Looking at the trends across the components of the leading economic index, among the six components, three of them show increases and three of them show declines over three months. Two of the indexes showing increases over three months are the lagging metrics; only one of the topical indexes shows an increase; i.e., the export-import balance. Over three months, share prices are down at a 0.8% annual rate, the interest rate spread is down at a 0.2% rate, and dwelling-starts are declining at a 0.5% annual rate. The two lagging indicators show little change over three months in May. The loan/deposit ratio is up by 0.4% annualized over three months while the OT gauge (overtime) for manufacturing is up at a 0.2% pace.

Over six months, only one of the components declines and that is share prices. However, the interest rate spread and dwellings have very small 0.1% to 0.2% increases. The export-import balance index improves by 0.5% while the lagging loan/deposit index is up at a 0.7% pace and manufacturing OT is up at a 1.3% pace.

Over 12 months, share prices decline by 0.7%; all other metrics show improvement.

The net change over 24 months reveals declines in the loan/deposit ratio and in the export-import balance. The lagging manufacturing OT is up by a strong 3.7% with a 1.4% rise in dwellings-started, a 0.8% improvement in share prices, and a one tick rise in the interest rate spread.

LEI vs. Confidence Comparing the LEI to the consumer confidence readings, we find that consumer confidence also fell in June. And it also declined over 12 months, six months and three months. The LEI and consumer confidence measures demonstrate shared weakness over the last year. Yet, both are up strongly over 24 months, by 10.3% for confidence and by 21.9% for the LEI.