Economy in Brief: December 2022

Ireland's inflation rate in November rose by 0.3% after surging by 1.5% in October and gaining 0.3% in September. There are hints here of inflation slowing since we have two moderate months, but there's a substantial increase between the two 0.3% increases in November and September that helps to drive the three-month annual rate up to an annualized 8.4%. That marks an acceleration from 8.3% over six months although it is slightly cooler than the 8.9% annual rate increase over 12 months.

Ireland's domestic inflation metric Ireland's domestic price index shows heated inflation with an 8.9% increase over 12 months, the same as the HICP total, carrying a pace of 8.8% over six months, above the six-month pace for the HICP, and rising to a 9.9% pace over three months that dwarfs the HICP three-month gain. The domestic index also offers up a CPI core measure that is a little bit more optimistic, showing a 5.5% gain over 12 months, rising to a 6.2% annual rate over six months but then falling to a 4.4% annual rate over three months. However, the CPI core is up 0.5% in November, by 0.5% in October and by 0.2% in September. It continues to run hot in recent months at a pace that's something more like a 6% pace, although the three-month pace is knocked down to 4.4% because of a relatively moderate result in September.

How broad is inflation? Ireland also offers some optimism on the front of diffusion. Diffusion measures the breadth of inflation acceleration from period to period. The diffusion values in the table show that diffusion over 12-months is at 75%. That means that over 12 months compared to 12 months ago, inflation is accelerating in 75% of the categories. Over six months, diffusion is down to 25%, telling us that only one quarter of the components of inflation are showing stronger inflation over six months compared to inflation rates over 12 months. Over three months, diffusion is still low, but ticks slightly higher to 33.3% indicating that one-third of the components are showing accelerated inflation over three months compared to six months. Diffusion values less than 50% indicate that inflation is accelerating and fewer than half of the category and that's good news. Diffusion gives us different results than the headline inflation measure because diffusion calculation treats all categories as equal without using any weighting. The headline inflation rate of course attributes weights and economic importance according to the category involved so there can be differences in diffusion and in overall inflation and its performance. But the idea behind diffusion is that if inflation is truly inflation, (a broad phenomenon, rather than driven by a few rogue categories), it should be infecting most of the components. Weighting may put a finer point on the pace of inflation but should not be a critical issue in detecting inflation. The Irish figures are reassuring because they show us that the breadth of inflation has narrowed quite a bit even though on a weighted basis inflation continues to run relatively strongly. The substantially lesser pace of core expansion adds to that sentiment.

Inflation across components When we look at the components in November, we get some sense of what's going on here with rent & utilities up at a very strong pace, rising by 0.7% in November and up by 8.1% month-to-month in October. This is a category with a very heavy weight and a very high inflation rate; it's one of the things that's driving inflation and causing the inflation numbers to be high even when the breadth numbers are not particularly menacing. Rent & utilities, for example, are up at a 46.1% annual rate over three months and rising at a 26.6% annual rate over six months. This is a category that's adding a great deal to inflation and its strong pace has been very stubborn.

On a quarter-to-date basis, inflation is not performing quite as well. These data are for November so we're looking at inflation for two months in the fourth quarter compared to the third quarter base. Viewed in this way, the HICP headline measures is up at a 9.1% annual rate, the domestic inflation rate is up at a 10.6% annual rate, and the domestic CPI core is up at only a 4.7% annual rate. Inflation in the headlines is still carrying a strong pace; the core is showing some significant temperance for inflation pressures in Ireland so far in the fourth quarter. In the fourth quarter, prices for clothing & footwear fall by -1.1%, education costs fall at a jarring -26.4% annual rate, restaurants and hotel prices fall at a -2.5% annual rate. However, rent & utilities are still rising at an enormous 54.4% annual rate in the fourth quarter lighting a fire under inflation, although because the category is rent & utilities it obviously has some energy mixed in with other housing cost measures- not all of it is in the core measure.

Norwegian industrial production has been weak and struggling since late-2021 as the graphic clearly shows. And despite some ongoing struggles and clear problems in Europe with energy and with security, Norway shows signs of stabilizing its manufacturing sector.

Norway's headline industrial production measure, which excludes construction, is decelerating from 2.8% growth over 12 months to 1.3% over six months to a decline of 2.6% at an annual rate over three months. Utilities output declines at a 10.3% annual rate over 12 months, logs a decline at a 24.2% annual rate over six months, and plunges to a decline at a 41.1% annual rate over three months. But that may be more a function of energy availability than a reference on economic activity. Although mining & quarrying is also weakening, from a 2.1% pace over 12 months to a modest 0.8% annual rate of gain over six months to a 5.4% annual rate of decline over three months.

Manufacturing is a counterpoint to encroaching weakness In contrast to those metrics, manufacturing is up by 1.7% over 12 months, it is falling at a 0.5% annual rate over six months but then is increasing at a 1% annual rate over three months. The three-month rate of change isn't particularly strong; however, it clearly breaks the chain of declining activity and provides a counterpoint to overall production, to utilities trends, and to mining & quarrying trends. The production of food shows uneven trends although within manufacturing the production of textiles does show sequential weakness migrating from a 2.8% growth rate over 12 months to a -5.9% pace over six months and to a -8.9% pace over three months.

Manufacturing sectors are mixed However, looking at the sectors within manufacturing rather than individual industries, we see a lot more ambiguity about trends. The consumer goods sector overall does show weakening with the growth of 4% over 12 months, a modest gain of 0.8% over six months and flat performance over three months. This is clearly decelerating growth. Consumer durables show declines in output on all three horizons, but there is a pickup - less of a decline - over six months followed by a much more severe decline over three months. Durables trends do look troubled. Consumer nondurables, in contrast, show growth on all three horizons, rising at a 5.7% annual rate over 12 months, at a weaker, 1.5% pace over six months then stepping up to a 2.6% pace over three months. Intermediate goods showed declines on all horizons, falling 0.4% over 12 months followed by a 5.6% annual rate drop over six months and a 4.5% annual rate drop over three months. The sequential trends may be muddied but the direction here seems clear. The capital goods sector, in contrast, shows acceleration with a 5.1% rate of growth over both 12 and six months that steps up to a 5.7% pace over three months. Manufacturing is a mixed bag with more weakness than strength on these metrics.

While these trends are mostly permeated by declines and weakness, capital goods is a striking contrast and the fact that industrial production does show clear declining trends. Manufacturing does not show weakness across all the sectors - in fact, it doesn't show decelerating trends overall, only in the overall consumer goods sector which culminates over three months in flat performance, not in decline.

Inflation runs hot...some let up Meanwhile, inflation in Norway continues to run relatively hot. The pace year-over-year is 8.4%; it rises to a 9.7% pace over six months, and then barely cools to a 9.6% pace over three months. The core inflation measure is up at a lesser 6.1% annual rate over 12 months, but that accelerates to 7.5% over six months, then it cools to a 5.5% pace. Still, all these are excessive growth rates for inflation.

Quarter-to-date... Quarter-to-date (QTD) industrial production excluding construction is up a very robust 7.9% annual rate; manufacturing output is up at a 3.3% annual rate; manufacturing consumer goods shows expansion at a 3.3% annual rate; intermediate goods output falls at a 4.3% annual rate. But capital goods output is rising at an 8.3% annual rate. The QTD calculations are nascent calculations for the fourth quarter representing the growth in October over the third quarter average with the growth rate properly compounded over that third quarter base. Over that same third quarter base, inflation is rising at a 10% annual rate QTD with the core up at a 6.6% annual rate.

Since COVID... As a summary statistic, I have taken the ratio of current industrial production to the level of industrial production just before COVID began in January 2020. Overall industrial production is up by 8.7% on that timeline (a bit less than 2% per-year on average), manufacturing production is up by only 0.4% on that timeline, mining & quarrying is up nearly 50% on that period. While utilities output is only up by 2.5%. Looking at manufacturing sectors, consumer durables output as of October is lower than it was in January 2020 and capital goods output is still lower than it was in January 2020. The strongest gains in output among these sectors are for consumer goods at 3.1% and consumer nondurables at 3.1%. Intermediate goods output is up by 2.4%.