Economy in Brief: 2022

Inflation in the euro area is and continues to be excessive. Finland continues to follow along with the pack. Finland’s PPI is up by 28.9% over 12 months, it's up at a 36.4% annual rate over six months and then it has “cooled" to a 27.3% annualized pace over three months. Ranked among a group of 14 European countries - mostly European Monetary Union members- Finland's year-over-year inflation rate in June stand at 9th among this group of 14 members. At that time, Finland's year-over-year inflation rate was 31.6% compared to 35.9% for the European Monetary Union overall at that time; the highest inflation rate among this group of countries in Europe was Belgium where inflation was up 50.5%, followed by Spain at 43.4%, and then Italy at 42.0%. Finland’s PPI inflation ranks ninth among these 14 members in June; that means that Finland is one of the middling inflation countries in Europe (This comparison group consisted of Germany, France, Italy, Spain, Portugal, Austria, Denmark, Greece, Ireland, the Netherlands, Finland, Sweden, Belgium, and Luxembourg).

In July, Finland's producer price index fell by 1%; it had risen by 3.2% in June and by 4% in May.

The price of manufacturing goods fell by 2.1% in July after rising 3.2% in June and 3.1% in May.

Within the manufacturing sector, consumer durable goods prices rose by 0.5% in July, consumer nondurable goods prices rose by 2.1% and investment goods saw prices rise by 0.3%. These increases show continued acceleration. Consumer durable goods prices had fallen by 0.2% in June, consumer nondurable goods prices had risen by 1.3% in June, and investment goods prices in July rose at the same pace as in June of 0.3%. The relief of headline price pressure in Finland reflects intermediate and raw goods whose prices are reflecting weakness in oil and other raw materials.

Manufacturing price momentum Demand continues to pull other prices higher. For all of manufacturing, prices gained 28.2% over 12 months and accelerate to a 44.3% annual rate over six months but then price gains dropped back sharply to a 17.2% annual rate over three months.

This progression is echoed ever so slightly by consumer durable goods where prices rise by 11.4% over 12 months, accelerate to rise by 17.4% over six months and then prices barely cool their trend rising by a 16.6% annualized over three months.

Consumer nondurable goods prices are up by 13.3% over 12 months, they accelerate to a rise of 18.3% annualized over six months and accelerate further rising at a 23.7% pace over three months. Nondurables are still experiencing clear price acceleration.

Investment goods prices rise at a 10.4% annual rate over 12 months and 11.3% annual rate over six months, a small acceleration, and then decelerate to an 8.8% pace over three months.

The S&P Global manufacturing PMIs and services PMIs on a flash basis weakened in August. The European Monetary Union, Germany, France, the United Kingdom, Japan, and the United States each show a weaker composite, a weaker manufacturing reading, and a weaker services reading in August compared to July. Dialing back one month, July saw that out of the 18 assessments possible only four showed month-to-month improvements. The U.K. was an exception having an improvement in its service sector in July that also strengthens the headline; Japan was an exception in July having an improvement in services that also strengthened its headline. In June, there are only three of 18 comparisons that improve month-to-month; they include manufacturing in Germany and the services sector in Japan.

The unweighted average manufacturing PMI value in August has slipped to 49.5 showing contraction on average. This compares to an average level of 51.6 in July and at 54.4 in June. The average services reading for the six entries in the table has slipped with a diffusion rating of 49.2, indicating minor contraction. This is a slippage from a level of 53.4 in July and 54.8 in June. The deterioration for both manufacturing and services has been relatively recent and relatively rapid. Viewed as stand-alone readings in August, the EMU services sector at 50.2 still shows expansion, France at 51.0 shows expansion, the United Kingdom at 52.5 shows expansion. Manufacturing in August shows expansion in the U.S. and in Japan with Japan’s 51.0 diffusion reading and the U.S. reading of 51.3. Where there are exceptions, they are not glaring exceptions.

On balance, over these three months viewed individually and collectively, the weakness is broad.

When we compare the three-month, six-month and 12-month averages, we are comparing them from a base in July, not in August which still has preliminary data.

Over three months on this basis, there are 9 of 18 readings that strengthen - a split decision. Over six months, there are 8 of 18 readings strengthen. Over 12 months, most of the readings strengthen with only four of them weakening.

Composite readings However, we can see from the table that August, once it gets into the mix, is going to be another weakening force that is going to weigh on these sequential trends. We can already see that the ranking of the August levels is extremely weak with the headline or a composite index ranging from the strongest value of a 36.4 percentile standing in Japan to the weakest standing at a 5.5 percentile standing in U.S. The average composite standing for the group is at a 22.5 percentile standing; it is in the lower 4th to lower 5th of the countries’ historic pooled queue of values.

Manufacturing and Services Manufacturing standings on the other hand range between a high of a 45.5 percentile standing in Japan to a 3.6 percentile outstanding in the U.K. The average percentile standing for the group is at the 24.4 percentile mark in the lower one-fourth of its historic queue of values. Services standings range between a high of 45.5 percentile in the U.K. to a low of 5.5 percentile in the U.S. The average percentile standing is at the 30.2 percentile.

These readings all are weak. Not only are the preliminary readings all weak or weakening month-to-month but the queue standings all reside below the 50th percentile; that's across all countries and for all three sectors of the composite for manufacturing and for services. It means all sectors are performing at less than their median rate.

Looking at the changes the composite indexes back to January 2020 before COVID struck, all the composite indexes in this table are weaker than they were in January 2020. All the services sectors are weaker than they were in January 2020; only three manufacturing sectors are stronger than they were in January 2020 and those are for the European Monetary Union as a whole, for Germany, and for Japan.

The magnitudes of change The one-month change in the composite indexes averages -3.9 points for manufacturing, the drop is -2.2 points, for the service sector it’s -4.2 points. In August, the services sectors were easing twice as fast as manufacturing. Over three months, the change in conditions is much flatter. The composite indexes declined by 5.5 points across these 6 table entries. The manufacturing sector is receding on average by 5.3 points over three months while the services sectors unwind by 5.6 points on average. Over three months, we're seeing roughly the same rate of erosion or deterioration in services as in manufacturing.

Over 12 months, conditions are a little bit different again. The 12-month average drop in the composite indexes is 6.8 points, while for manufacturing the average drop is 9.8 points and for the services sector the average drop is 6 points. Over 12 months, the manufacturing sectors are deteriorating faster than services. Germany is a minor exception to this trend. The U.K. conforms to it more significantly than any other country with a -14.1 drop in its manufacturing index over 12 months compared to just a -3.1 drop for services. Japan is the only country in the table that shows a 12-month improvement in services against a 1.7 drop in manufacturing.

The National Bank of Belgium index for consumer confidence rose to -11 in August from -13 in July, returning to its June level. Three months ago, the index stood at -13. Six months ago, it stood at +1. Twelve months ago, it stood at +5. Despite the month-to-month improvement, the index has been on a weakening trend; it has weakened most sharply over three months. The index positions itself in the lower one-third a of its values since 1991 with a 32.1 percentile queue standing. This reading means that the index has been weaker than its current value about one-third of the time, marking this as among some of the weaker readings for Belgium since 1991, roughly the last 30 years.

The economic situation for the last twelve months made an improvement to -57 in August from -63 in July. This is a weak assessment. The August trailing assessment of -57 has a queue standing in its lower 7.6 percentile. The companion rating this month, for the next twelve months, looking ahead, has a reading at -32, which is a slight improvement from July's minus 37 rating. The 12-month ahead August reading is even (slightly) weaker in its historic queue than the evaluation of the past twelve months with a 5.8 percentile standing. Clearly the economic situation has been poor, and is expected to remain poor, despite the slight month-to-month improvement. This month's report earns the sound of one-hand clapping.

Price trends in the BNB survey over the previous 12 months more or less stabilized with a reading of 86 in August compared to 84 in both June and July. Over the next 12 months, some progress on inflation is expected with the index falling to 19 compared to 25 in July and 34 in June. Nonetheless, the broad progression of this index has been for deterioration with the 12-month-ago reading at 19, the six-month-ago reading at 33, and the three-month-ago reading at 41. Clearly, this shows a local trend of improvement that is resisting a broader trend of deterioration. The standing for price trends for the next 12 months is at its 52.6 percentile mark. This is an extremely sharp improvement from the 99.7 percentile standing that evaluates price trends over the last 12 months. The standing assessments show that inflation has progressed from some of the very weakest reading in the history of the survey to readings that are far more centrist near the middle of the distribution. That level of assessment might seem surprisingly high given the height of inflation in the EMU relative to target that prevails today. It may be colored partly by encouragement that the past extraordinary inflation environment is being put to rest.

The unemployment forecast shows some heightened risk of unemployment in the August index as it climbs to 16 from a level of 12 where it stood in both June and July. The unemployment forecast has had an uneven progression from twelve-months to six-months to three-months. Its current standing, at a value of 16, has a 34.7 percentile standing in its historic queue of data marking unemployment expectations is being close to the lower one-third of values in its queue of ordered data since 1991. Unemployment is more greatly feared, but the fear is not pronounced.

The major purchase index for the next 12 months has stabilized over three months at a reading of -20 in August. It had steadily eroded from twelve-months to six-months to three-months. Similarly, the present index has eroded and shows only a one-month improvement after a string of erosion.

The financial situation for the last 12 months stabilized at readings of -17 in each of the last three months. However, that represents a deterioration since 12 months ago the reading was -5, six months ago it was -11 and three months ago it was -13. The assessment of the last 12 months has deteriorated and then stabilized. It has stabilized at a level that is in the lower one percentile of its historic queue up data! The assessment of the past 12-months has been extremely poor for a household's financial situation. Over the next 12 months, the household financial situation garners a -8 reading in August compared to -7 in July and -8 in June. The broader progression shows that twelve months ago, the household assessment was at zero, six months ago it was at -5 and three months ago it was at -9. The current -8 rating has a 1.6 percentile standing, once again an extremely weak reading, among the weakest 2% of ratings by households of their financial situation looking ahead to the next twelve months since 1991.

Households rate their ability to save over the next twelve months more favorability this month; the favorability of saving currently improved slightly as well. Their respective standings, however, are moderate. The next twelve-month reading has a 63.9 percentile standing and the assessment of the current ability to save has a 52.2 percentile standing. These are mid-range assessments.

Japan's inflation rose by 0.4% in July after slowing to a 0.1% gain in June. The category, all prices excluding fresh food saw prices grow by 0.5% compared to a 0.2% June gain. All items less food & energy rose by 0.2% after gaining 0.1% in June. Western economies would kill for these trends…

Across the eight major components listed in Japan's CPI, four of them show extremely weak (or no) gains month-to-month in July. Education, medical care, and miscellaneous goods show prices rising by 0.1% while housing showed no gain at all month-to-month. Food & beverage prices rose by 0.5% month-to-month. Clothing & personal items prices rose by 0.5% and transportation & communication prices rose by 0.4%, while reading & recreation prices surged by 0.7% but that followed a 0.6% June drop.

For the headline and for most components, in fact - for nearly all components, Japan shows no tendency- no clear trend - for inflation to either accelerate or decelerate. The one significant departure from this is for all items excluding food & energy where prices rise 0.3% over 12 months, at a 2.2% annual rate over six months and at a 2.4% annual rate over three months completing a clear sequential cycle of trend acceleration for the core CPI.

However, the headline and the headline excluding fresh food do not show any such pattern nor do any of the 8 major components of Japan's CPI. None of the 8 main components show either inflation clearly accelerating or decelerating. All of the components have a mixed pattern. Only when in the core, with food & energy stripped out, does this trend emerge. Over 12 months compared to the year ago, headline and core inflation both accelerate as does the total CPI excluding fresh food. And among the eight major categories inflation accelerates for food & beverages, medical care, and for transportation & communication. This is despite the fact that the inflation rates actually are negative for medical care and for transportation & communication but those prices fall at a slower pace over 12 months than they did one year ago, hence ‘acceleration.'

Six-month trends show acceleration for the headline to the core CPI and for the total CPI excluding fresh food. Food & beverage prices accelerate, housing costs accelerate, miscellaneous prices accelerate, reading & recreation prices accelerate, and transportation & communication prices also accelerate over six months compared to 12 months. Among the eight components of the CPI, five of them accelerate and three of them decelerate.

Three-month trends show a weakening of inflation compared to six-months for the headline CPI and for the headline excluding fresh foods. The core rate continues to accelerate. Among the eight detailed categories, prices accelerate in half and they decelerate in the other half. Prices accelerate for clothing & personal items, for education, for medical care, and for reading & recreation.

If we calculate acceleration in a truncated fashion, by skipping the six-month to one-year change and just comparing the three-month annualized change to the 12-month change, then Japan's inflation rate accelerates in the headline categories as well as in all 8 detailed product categories. I supposed we can conclude that inflation is lurking in Japan and rising with some degree of subtlety.

We see the strength in prices in the quarter-to-date developments. The current data are for July, so that's the first month of the third quarter. These calculations compute the annualized inflation rate by taking the July gain over the previous quarter's average and compounding that gain from the center of the quarter. On that basis, headline inflation runs at 3.2% early in Q3. The CPI excluding fresh foods runs at a 4.2% pace. The core rate rises at a 2.2% rate which is actually a pace slightly below its three-month pace. The quarter-to-date calculation across the eight detailed components of the CPI show price gains that generally are slightly weaker than the gains calculated over three months.