Economy in Brief: March 2022

German inflation rose by 0.4% in February after rising by 1.5% in January. The core rate fell by 0.3% in February after rising by 0.6% in January. Sequential growth rates show that the HICP measure of inflation for Germany rose at a 5.5% annual rate over 12 months, accelerated to a 7.8% rate over six months but cooled its pace to 7.4% over three months. Similarly, core inflation rose by 3.1% over 12 months, at a 4.1% annual rate over six months, then fell back to a 1.8% pace over three months. The bad news, of course, is that inflation in Germany remains exceptionally high; 5.5% is an extremely high headline inflation rate. The core pace of 3.1% is well above the 2% goal for inflation for the entire of the EMU area set by the European Central Bank. However, inflation in Germany is decelerating! It decelerated from six-months to three-months for the headline; for the core the deceleration is substantial and significant.

...and the details are devilishly good In addition to deceleration in the HICP, diffusion calculations show that the increases for inflation by category are actually not prevalent. However, over 12 months inflation is high, virulent, and broad-based. The 12-month inflation rate, which is at a 5.5% pace for the HICP headline, is 5.2% for the German domestic CPI. It registers a 72.7% diffusion reading. That's an extremely high reading, but that's for the year-over-year pace compared to the pace of one-year ago.

If we look at a six-month horizon, inflation rate accelerates to 7.8% from 5.5% in the HICP while the domestic gauge accelerates to 6.7% from 5.2% inflation. But over six months diffusion drops to 36.4%. This is significant. Below 50% diffusion is telling us that inflation is not very widespread. In fact, it's telling us that falling inflation is a more common characteristic than rising inflation. At 36.4%, diffusion for German inflation has already cooled broadly compared to 12-months despite the increase in the headline rate. Of course, what that means is that inflation is being carried ahead by just a few categories pushing the headline up aggressively even though that kind of inflation experience does not line up across most categories.

The three-month HICP headline shows deceleration to a 7.4% pace from 7.8%. For the German domestic inflation rate, however, there is an acceleration to a 7.4% pace from a 6.7% pace. The domestic CPI excluding energy accelerates to 3.7% from 3.5%. The domestic ex-energy acceleration is a small one, but it's different from the HICP core which showed a significant decline to a pace of 1.8%. However, when we look at the details of diffusion, we find once again that the diffusion for inflation over three months compared to six months there's only a 36.4% diffusion marker. Inflation does not accelerate broadly over three months compared to six months either.

The behavior of inflation overall depends in some sense which of these gauges you want to look at. Over three months, it's decelerating for headline inflation and accelerating for the domestic measurement; it's decelerating for core HICP or it's accelerating for the CPI excluding energy. So, what you see for German inflation depends a lot on the actual metric you want to use to measure it. However, if you look down the line at various components of the CPI report, you find that inflation is not accelerating very many places. And in most places, there is a decelerating pace over three months and over six months. That is an important consistency.

Oil It's also interesting that this is happening in Germany as Brent oil prices continue to push higher. In February Brent was 9.6% higher than in January; January was 14% higher than in December; the December Brent price did back off by 6.3%. If we look at the sequential growth rates, over 12 months Brent is up at a 61% annual rate, over six months it's up at a 91.5% annual rate, and over three months it's up at an 88.1% annual rate. Yet, the inflation metrics do not show that inflation is permeating the German economy.

Irish inflation gained 0.3% on its HICP measure in February; that's down from 0.4% in January and level with December’s 0.4% gain. Year-over-year Irish inflation is running 5.7% and increases to a 6.7% annual rate over six months but falls back to a 4.2% annual rate over three months. Ireland's domestic CPI measure tracks the results for the HICP monthly; the sequential trend is also very similar to what the HICP posts over 12 months, six months and three months. On balance, Irish inflation appears to have stopped accelerating, but it isn't clear whether this is a pause or whether there's more to come.

The domestic CPI measure has a core rate available. The core rate for Ireland shows a 3.7% gain over 12 months, a 3.3% annualized gain over six months, and that pace ticks up to 3.5% over three months. For Ireland, the core inflation performance is relatively flat and there is a hint that inflation may be stable in the neighborhood of 3.5% (still well above the ECB’s 2% objective for inflation in the EMU area). However, it's still hard to tell and certainly hard to tell with so much pressure still present in the headline and with global oil prices and commodity prices showing so much pressure and volatility themselves. On a quarter-to-date basis, the HICP for Ireland is up at a 4.8% annual rate (that's two months into the quarter). The domestic CPI measure is up at a 4.7% annual rate QTD, nearly the same as for the HICP. However, the core CPI is up at only a 1.7% annual rate in the unfolding quarter which is not only mild but it's within the overall target band sought by the European Central Bank. Can things really be that good this soon?

Is the Irish CPI smiling? The domestic Irish CPI shows 11 major components for inflation; these show the annual inflation rate is up with a breadth of 66.7%. That kind of diffusion (approximately acceleration in two-thirds of the CPI categories) is quite high and disturbing. Over six months, the diffusion ranking falls back to 58.3%, still showing acceleration with uncomfortable breadth. However, over three months, the diffusion measures steps back to 41.7% to accompany its milder pace. That's below the 50% mark and 50% is the dividing line between inflation accelerating or decelerating. Over three months, inflation is decelerating in more categories than it's accelerating and for Ireland this is a potentially significant result and potentially a signal that inflation it's not pausing before accelerating but is pausing because it's not going to be accelerating.

Extreme price moves over three months Still, there's still plenty of inflation in Ireland and a lot of categories that are quite troublesome. For example, prices for alcohol are increasing at a 27.8% pace over three months. Rent and utilities as an aggregate category shows inflation up at a 9.9% annual rate over three months. The recreation and culture category shows inflation at a 5.6% annual rate over three months; food prices are up at a 6.8% annual rate over three months. Balancing those clear excessive gains are communication where prices are declining at a 3.9% annual rate, education where prices are falling at a 3.7% annual rate, and the catch-all ‘other’ category where prices are declining at a 4% annual rate.