Economy in Brief: May 2025

Headline German inflation has logged another stellar number showing prices down 0.7% in April after falling 0.7% in March and dropping by 0.2% in February. German inflation over three-months is falling at a 6.4% annual rate, over six-months it is falling at a 2.6% annual rate, and year-over-year it is falling by 0.9%. That progression shows clear discipline for German headline inflation and, in fact, raises the specter that inflation might be too weak with year-over-year inflation falling -1% at an annual rate, however, that's only part of the story

Polar opposite trends for the headline vs ex-energy In April the PPI excluding energy rose by 0.3%, it rose by 0.2% in March, and by 0.2% in February. The same progression for the PPI X-energy shows inflation running at 2.7% annual rate over three-months at a 1.9% annual rate over six-months now to a 1.7% annual rate year-over-year. This means, of course, instead of decelerating with prices receding, inflation is accelerating and rising. These are not just slightly different takes on inflation, these are polar opposite events, calling for polar opposite concerns, and polar opposite policies.

The role of oil When we wrote about CPI results earlier, we pointed out the same phenomenon was in place with headline CPI inflation very well behaved and core inflation not doing quite as well (see the CPI data in the table above). However, with the PPI this dichotomy is even clearer and it comes with the same source of divergence, the fact that Brent oil prices have been falling sharply the table shows Brent oil prices (adjusted into Euro terms) falling in April and March and in February and further shows the euro cost of Brent oil prices prices falling at a 60% annual rate over three months, following the 25% annualized drop over six-months, and the the 28% annual rate over 12-months. Oil prices are the engine that is making the inflation performance look good. However, beyond energy, the forces of inflation are still firm, still percolating, and in PPI terms, while they are at an acceptable year-over-year pace, they are beginning to accelerate as the three-month pace for inflation at 2.7% is too high.

Inflation by sector Inflation statistics by category shows consumer goods (NSA) inflation at 3% over 12 months, 4.5% over 6-months and at a 4.8% annual rate over three-months - excessive and accelerating. For investment goods inflation runs at 2% year-over-year up at a 2.8% pace over 6-months and then at a 2.4% pace over 3-months not exactly accelerating but both three- and six-month inflation rates rise above the preferred 2% year-over-year pace. Intermediate goods show inflation at 0.3% over 12-months, rising to 1% at an annual rate over 6-months and at a 3.5% annual rate over three-months.

The table includes the CPI as a reference point and there we see that the CPI sequentially is running at a fairly steady 2.1% to 2.3% annual rate. The ex-energy inflation rate is higher although still relatively flat in the 2.6 to 2.8% range- roughly one-half of one percentage point hotter than the headline.

Q2 Inflation Starts the quarter mixed Inflation in the second quarter, a quarter that data-wise is just beginning, shows the headline PPI falling 6.1% at an annual rate with the PPI ex-energy rising 3.1% at an annual rate sector readings show consumer goods, investment goods, and intermediate goods inflation runs between slightly- to substantially-excessive early in the second quarter. The German CPI and CPI ex-energy readings are running slightly hot even though on this time horizon Brent-euro-based oil prices are falling at nearly 50% annual rate.

Wrap on inflation: a dichotomy, but not a real problem A German PPI is not disturbingly strong but once again it's slightly strong and only the headline is really behaving and that's under the influence of some extraordinarily supportive news from oil prices. The headline, in fact, looks worrisome in the other direction because of the ongoing oil price collapse. On balance inflation in Germany appears to be still somewhat stubborn. Germany continues to be buffeted by the forces of war and the uncertainty over US tariff policy as well as the prospect of its own recently inherited burden to take care of its own defense expenditures, something that is likely to underpin growth in Germany and possibly to stoke more inflation pressures. These factors continue to be the main forces to keep an eye on in Germany. For its part, the ECB has warned that the future may be shaping up with different risks.

European Monetary Union inflation rose by 0.1% in April but the core is rising by 0.3%. The headline rate rose by 0.2% in February and was flat in March; the core has slightly accelerated in April from its 0.1% gain in February and its 0.2% rise in March.

The progressive headline inflation sequence shows inflation stable to accelerating with a 2.2% annual rate over 12-months, a slight uptick to 2.3% annual rate over 6-months and then down to a pace of 1.4% over 3-months. The EMU core shows a steadier deceleration with a 2.7% rise over 12-months, a 2.5% annual rate gain over six-months, and a 2.3% annual rate gain over three-months.

In April the largest monetary union economies show that monthly inflation has been well-behaved with no change in Germany, a 0.1% increase in Spain, and a 0.1% decline in Italy; all of that is juxtaposed against the 0.4% rise in France but France's increase comes after several months of the headline inflation declining. France is not really an outlier in this process.

Looking at sequential inflation rates across the largest monetary union economies, Germany shows inflation decelerating with the 1.9% annual rate over 12-months and six-months then showing prices declining 0.6% at an annual rate over three-months. France shows inflation at 0.9% over 12-months down to a 0.5% at an annual rate rise over six-months and with prices falling at a 1.4% annual rate over three-months. Italian inflation, contrarily, is accelerating from 2% over 12-months to 3% over six-months to an annual rate of 3.3% over three-months. Italian inflation expands 2.1% over 12-months, rising to a 3% pace over six-months, then with shows prices falling at a 0.8% annual rate over three-months. These are unclear trends, however, for three of the four largest economies, prices are falling over three-months on balance. However, that kind of optimism doesn't carry through to core inflation. Clearly, the driving good-inflation news is falling Brent oil prices. Brent prices, expressed in euros, fell 10.7% in April after falling 7% in March and falling 4.3% in February. Over the sequential periods we have Brent oil prices down 27.7% over 12-months falling at a 25% annual rate over six-months and falling at a 60% annual rate over three-months. It's no surprise whatsoever that headline inflation in the monetary union is behaving in the face of such oil price weakness.

Core inflation in the monetary union tells a very different story. For Germany we have inflation excluding energy prices; on that basis data show some deceleration but from 2.8% over 12-months to 2.6% over 6-months and then a slight back up to 2.7% at an annual rate over three-months. French core inflation is stuck but it appears to be stuck below the 2% mark with a 1.5% gain over 12-months, a gain of 1.8% at an annual rate over six-months and a gain at 1.6% get an annual rate over three-months. In Italy inflation is up 2.1% over 12-months, up at a 2.2% annual rate over six-months and up at a 2.7% annual rate over three-months. Core Spanish inflation is cruising just above the ECB's desired mark at a 2.3% annual rate over 12-months, at 2.1% annual rate gain over six-months and a 2.3% annual rate gain over three-months.

More Progress to come! The inflation news for the monetary union is not particularly bad, it just simply hasn't conformed to its target yet. A year ago, year-over-year inflation was 2.2%. That's the same as year-over-year inflation now, in April of 2025. A year-ago core inflation for the monetary union was up at a 2.7% annual rate over 12-months, and now, in April, it's rising at the same 2.7% annual rate. Still, for all of 2025 inflation is expected to be only slightly above the 2% mark, reaching its target pace by mid-year. Annual 2.1% inflation is expected for all of 2025; it then is predicted to dip below 2% in the next two years. Clearly what happens with the United States tariff negotiations will have a big impact on these estimates.

This week, we continue to monitor developments stemming from US trade actions across Asia. China’s latest monthly data reflects encouraging resilience, even as initial impacts from recent steep US tariffs become visible (chart 1). Notably, despite heightened US restrictions on chip exports, China's semiconductor imports from the US remain robust (chart 2), highlighting the careful balance US producers are maintaining between complying with regulatory constraints and preserving valuable commercial relationships. Meanwhile, in India, trade discussions with the US have remained prominent, showing early signs of meaningful progress. Economists continue to highlight India’s strong growth potential for the year (chart 3). However, a potential tension has surfaced around Apple's shift of iPhone production to India—a trend already evident in rising Indian exports (chart 4)—with US President Trump openly criticizing the move and reaffirming his commitment to boosting domestic manufacturing. In Japan, economic indicators were already signalling weakness prior to the introduction of the US “Liberation Day” tariffs (chart 5). Further anxiety stems from the risk of stalled US-Japan trade negotiations, which could potentially trigger renewed tariff hikes, exacerbating Japan’s already faltering trade performance (chart 6).

Latest Chinese data releases China released its usual batch of monthly data today, offering a mixed set of results. While not uniformly strong, the figures showed no clear signs of the significant drag on growth that might have been expected from the initial impact of US tariffs. Industrial production outperformed expectations, rising 6.1% y/y in April (see chart 1). In contrast, retail sales and fixed asset investment growth came in below forecasts but remained in positive territory. Meanwhile, the unemployment rate edged lower, while house prices continued to decline. Overall, April’s data suggests a degree of resilience in China’s economy, despite the 145% US tariffs that took effect earlier in the month. With a 90-day pause on further tariff escalation currently in place, there may be some short-term relief—provided no new adverse developments emerge.