Economy in Brief: 2022

The Office of National Statistics (ONS) in the UK reports that inflation accelerated to 9% in April from 7% in March. This puts inflation at the highest rate since the series began in January of 1989 and the statistical authorities say that it would have last been last higher sometime around 1982- that puts UK inflation at a 40-year high.

In the table above we memorialize the CPIH rate which is currently at 6.3% year-over-year with a core reading of 5.2%. This gauge accelerates from 12-months to 6-months to 3-months both in terms of the headline and in terms of the core rate where the core is the CPIH excluding energy, food, alcohol, and tobacco.

The rise in inflation is creating plenty of blowback pressure on both the Bank of England which is being accused of moving too slowly and on the administration of Boris Johnson that has been under fire for several different reasons. Inflation, when it rises, becomes a political problem for just about everybody involved. Let the finger-pointing begin!

For its part, the Bank of England has expected inflation to accelerate; at its recent meeting it looked for inflation to rise to about 9% in April and it looks for some further increases in the coming months and for inflation to peak somewhere around 10% in the fourth quarter. What we see from the BOE apparently is the same tact taken in the US where the Fed seems to be raising interest rates steadily with intent to corral and eventually control inflation. But the plan does not seem to be to jump rates up to create a more traditional ‘positive real interest rate’ based on the current level of inflation. Central bankers are being more cognizant of the impact of rate hikes on growth- for better or for worse.

Inflation is a global phenomenon and there's not too much debate about that. Highly developed economies that are not suffering an inflation problem are unusual, Japan is the best example of it. Japan is a country that has had a challenging time getting inflation up to its inflation target for some time so it's not surprising that in an inflationary environment Japan would be the country that doesn't run much of an inflation rate. However, Japan now has the problem of a sinking exchange rate which should encourage more inflation and could change this calculus.

Inflation in the UK shows that inflation has accelerated in March compared to February with the diffusion reading of 54.5. This diffusion reading is constructed by taking all the accelerations of inflation across product categories month-to-month and half of the observations that are unchanged as a percentage of an 11-category framework that includes the 10 categories in the table plus the core as if it were a separate observation. This diffusion rating marks an increase from the 45.5 percent logged in February and compares to the 54.5 level logged in January. Inflation diffusion measures have been slightly pro-inflation (above 50%). Diffusion is the metric that compares the number of industries where inflation is accelerating to the number of industries where inflation is decelerating. However, the presence of inflation itself is clear with the headline of 1% in March compared to a monthly rise of 0.5% in February and 0.5% in January. The core rate is up 0.8% in March compared to 0.4% in February and 0.6% in January. Inflation diffusion may not be mushrooming but inflation itself is entrenched at an elevated level and showing an ongoing tendency to rise further, even is that tendency is slight in diffusion terms. A less discussed aspect of diffusion is that UK inflation is already very high and is not backing down in many categories after rising.

Inflation diffusion over broad time horizons shows that inflation had accelerated very broadly but has since reduced its breadth. Over 12-months for example inflation has risen in 90% of the categories compared to the inflation rate of 12 months ago. Over 6- months once again inflation is up in 91% of the categories compared to the increase in inflation over 12-months. But then over 3-months inflation is up in only 54.5% of the categories compared to its 6-month pace. However, as we showed at the very beginning all these inflation rates, the headline, and the core rates, accelerate from 12-months to 6-months to 3-months despite diminishing breadth.

The Bank of England is taking steps to head off inflation just as the Federal Reserve has been taking steps in the US while the European Central Bank is only making plans to head off inflation. Because the pandemic struck globally every country at about the same time there was a squashing of demand and then a ballooning of demand everywhere on the same timeline. The increase in demand has been particularly concentrated in the goods sector creating excess demands and shortages and interacting with supply chain problems that developed first in the wake of the pandemic and then, that have been exacerbated, by the war waged by Russia against Ukraine. Fiscal and monetary policy were used to try to soften the blow from the pandemic but in combination with the excess demand this has proved a potent brew to slake the thirst of inflation.

Central banks now have a daunting task to try to get the toothpaste back in the tube after an extended period of price stability- one in which inflation was not only low but for an extended period inflation was too low undershooting central banks targets. Historians eventually will decide whether central banks compensated too much for their past undershooting or whether they simply made errors in trying to offset the weakness in the pandemic and forgot to account for the stimulus from fiscal policy. Another potential aspect of policy error is simply that everybody in the world was on the same business cycle with exactly the same things going on and the stress of demand on supply was just simply too great.

In the meantime, however, central banks must make policy. The Bank of England is raising rates the Fed is raising rates the ECB is making plans. Countries are recovering from COVID and they're also just a little more than a decade distant from the Great Recession where a great deal of damage was done to economies. In the mid-1970s when inflation grew and mushroomed there was a national consensus that inflation had been too high for too long and there was a will to bear the cost to reduce inflation to a more sustainable level. Now, however, central bankers struggle with inflation and with the timeline for controlling it. They also face less political support and even political opposition. That makes the job of central banks much harder.

When inflation becomes a problem for the public it becomes a problem for politicians. However, absent inflation, politicians tend to prefer pro-growth policies and will pressure central banks to create an environment that will create more growth. However, when that strategy backfires and inflation goes up, politicians will be the first to wash their hands of responsibility and to blame the central banks and the fiscal authorities for their unreasonable and outrageous behavior. How could you, sir! Such is the state of the world in which we live the pressures and the realities that central banks now face and must deal with. These also are global realities.

Industrial output among EMU members fell by 1.8% month-to-month in March following a 0.5% increase in February and a 0.8% decline in January. The corresponding S&P Global manufacturing PMI index for these three months shows declines in March and February but an increase in January.

Looking across the countries in the table, there are 13 European Monetary Union members and three non-EMU members. We see output declines in nine countries as of March. This is a step up from 6 declines in February and it compares to 8 declines in January.

Sequential growth rates show that six of the countries in the table have decelerating output over three months, only two have decelerating output over six months and five have decelerating output over 12 months.

The consolidated figures by sector showed that overall European Monetary Union output declines by 0.9% over 12 months, increases at a 1.2% annual rate over six months but then declines sharply at an 8.1% annual rate over three months. Quarter-to-date, output is rising at a 3.7% annual rate- with today’s report the first quarter data are complete on a preliminary basis. Manufacturing output in the quarter-to-date is even stronger, rising at a 5% annual rate. Looking at sector trends, the consumer sector shows output up at a 13.3% annual rate, led by a 15.1% annual increase for consumer nondurables compared to a 4% annual rate of increase for consumer durables in the quarter-to-date. Intermediate goods output rises at a 1.4% pace while capital goods output is falling at a 0.5% pace.

The sequential growth rates for sectors show clear cut acceleration for consumer durable goods output. Consumer nondurable goods output looks healthy but fails to go over the bar to have consistent acceleration since there's a small step back over six months but the three-month growth rate at a 12.3% pace is well ahead of its 12-month growth rate of 2.8%. Intermediate goods output falls over 12 months by 0.2%, runs flat over six months, and then falls at a 5.9% annual rate over three months. Capital goods output, similarly, falls over 12 months by 2.9%, marks an increase at a 2.7% pace over six months, then falls very sharply at a 21.2% annual rate over three months. These data show relatively healthy increases in the consumer sector with uneven or weakening trends for intermediate goods and capital goods with some severe encroaching weakness for capital goods.

Capital goods not only show that output is lower in the quarter, when compared to the pre-COVID level, output is also lower- that is over two years ago. Capital goods output is down 5.7% from its level in January 2020. All the other industrial sectors show increases. This decline in capital goods is enough to knock manufacturing output down by 0.4% on the same timeline well overall industrial output falls by zero point 7% on the same timeline.

Going back to country details of the 13 reporting European Monetary Union countries, six of them have declining output in the quarter-to-date; however, none of the declines are among the four largest EMU economies Germany, France, Italy, or Spain.

Five EMU countries still have levels of output that are below their levels of January 2020 before the virus struck. These include Germany, France, Malta, Luxembourg, and Portugal. In addition, non-EMU member, the U.K., has output lower by 0.5% on this timeline and Norway has output lower by 0.8% on this timeline.