Economy in Brief: August 2022

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.

Inflation in the European Monetary Union in July finalizes at 8.8% year-over-year. The gain for July is 0.7%, slightly softer than June's 0.8% and the same as May’s 0.7% rise, marking a strong run of price increases in the European Monetary Area.

Among the largest economies and the EMU, Spain's year-on-year inflation rate at 10.7% leads the parade, followed by Germany at 8.4%, Italy at 8.3%, and France at 6.8%. The United Kingdom, the second largest European economy but not a European Monetary Union member and no longer a European Union (EU) member, logs inflation at a 10.1% pace over 12 months. In all cases, the year-over-year inflation rate has accelerated at least slightly compared to the month before, and (of course), sharply form the year before.

While it seems inflation has been elevated for a long time, comparison with inflation rates a year ago remind us that that's an illusion. Twelve-months ago the pace in the European Monetary Union was excessive but stood at 2.4%. German inflation was excessive at 3.2%, Spanish inflation was excessive at 2.9%, but French inflation was within the target parameters at 1.5%, as was Italy's at 1.0%. Inflation in the euro area has been creeping up over the target for a while, but the aggressively excessive inflation is still a relatively new phenomenon.

Core vs. headline The results for core inflation underscore that core inflation rates are significantly below the headline. The overall European Monetary Union rate at 8.8% is more than double the pace of the core that is up by 4% year-over-year in July. Individual member rates are substantially below headline rates as well. Spain has the highest core rate at 6.2% (but that is still only about 60% of the headline pace in Spain). Spain’s strong core pace is followed by Germany’s, whose ex-energy rate is 4.4%, then by France where the core is up 4.3%, and in Italy with the core up by 4.2%. In comparison, the U.K. has a much hotter core inflation rate running at a 6.6% pace.

Acceleration The tendencies for inflation to accelerate breakdown a little bit this month. For headline inflation six-month inflation accelerates compared to 12-month inflation but then the three-month inflation rate steps down to a 9% pace from a 10.1% pace. Core inflation at 4% year-over-year dips to a 3.7% pace over six months and then jumps back to a 4.5% pace over three months accelerating vs. both its six-month pace and its 12-monht pace.

Acceleration by country Headline inflation among European Monetary Union members shows all members with accelerating inflation from 12-months to six-months. However, from six-months to three-months inflation accelerates in Italy and in Spain while it decelerates in Germany and in France. However, only in Germany among EMU members is the three-month pace of inflation below the 12-month pace of inflation.

Core inflation among EMU members shows acceleration everywhere from 12-months to six-months. From six-months to three-months, however, ex-energy inflation decelerates in Germany, while core inflation accelerates and all the other EMU members. Also, German core inflation is lower over three months than over 12 months but for all the other EMU members three-month inflation exceeds 12-month inflation.

Energy prices Oil and energy prices have been a clear driver of inflation in the European Monetary Union with Brent prices expressed in euros up by 64.1% over 12 months, up at an 85.9% annual rate over six months and now slowing as they are up at the 21.6% annual rate over three months. The monthly data shows sizable Brent price increases in May and June but in July prices broke falling by 7.3% month-to-month.