Economy in Brief: 2022

Italy's inflation rate remains high and continues to show acceleration in February. The inflation gauge as measured by the HICP shows Italian prices up 1.3% in February, slightly less than the 1.5% they grew in January, but still a very high increase month-to-month. The HICP core gain was 0.9% in February, up from 0.5% in January. Italy’s domestic inflation measures continue to show heat as well.

Inflation accelerates broadly The sequential inflation rates for Italy show the headline rate going from a 6.1% pace over 12 months to a 9.5% annual rate over six months to a 13.8% annual rate over three months. For the core rate, that progression is 1.8% over 12 months, 4.1% over six months and 6.3% over three months. Both headline and core measures of inflation show acceleration. Prices remain hot monthly across the board. Not only is Italian inflation high and accelerating but the diffusion characteristics of inflation reinforce the notion that inflation is accelerating and broad. The diffusion index for three-month inflation is at 75%, for six-months it's at 75% and for 12 months it's at 58.3%. A diffusion reading at 50% implies that inflation acceleration and deceleration for the period are balanced across various CPI line-items. At 75%, the diffusion index is showing inflation is greatly tilted toward acceleration and we see that condition over three months and six months as well as a sizable tilt toward more inflation acceleration over 12 months.

Monthly trends Looking at monthly data the inflation rate across the various domestic components, we find it increased in all but two of them in February- that's an acceleration in all but two out of 12 components. Similarly, inflation increased month-to-month in January for all components except 2 and the same was true in December. The monthly data reinforce what we see in the sequential data: they show that inflation is accelerating period-to-period whether it's 12-months to six-months to three-months or December to January to February.

Quarter-to-date On a quarter-to-date basis- this is with two months of data in for the first quarter- inflation is rising at a 13.6% annual rate for the headline HICP and at a 5.4% annual rate for the core. The domestic measure shows headline inflation at an 11.5% pace with the core at a 3% pace. The domestic measures are slightly less hot than the HICP measures employed by the ECB.

Despite the high inflation levels in Italy, Italian inflation has generally been tracking below German inflation in recent years. Italy went through a period of austerity and was able to gain control of its inflation rate. But now inflation seems to permeate the economy and Italy has a clear inflation fight on its hands. Increases in global energy costs are going to continue to weigh on Italy, a country that is dependent on imported energy. The ECB will be raising interest rates to try to fight off these inflation effects as the year goes on, but inflation in Italy appears to be high, entrenched, and broad so the economy is going to have a lot of work ahead of it to put this inflation back down inside parameters that are acceptable from an EMU-wide targeting standpoint of around 2%.

The ZEW economic index for Germany fell more sharply in March than it ever had previously in its history. The German macroeconomic expectations index for March logged a -39.3 value after posting 54.3 in February; that change produces a net decline in the index of 93.6 points for the month. The U.S. expectations index also weakened, from 13.1 in February to -26.1 in March, a lesser but serious step-back.

Germany is reeling under the sanctions that it imposed on Russia in combination with the war in Ukraine on its doorstep. These two events have shattered expectations and caused current conditions to weaken sharply. In Germany, the current conditions index which was -8.1 in February has backtracked to -21.4 in March; this compares to a U.S. current conditions index that was 46.2 in February and has backtracked to 31.7 in March. Clearly concerns about the war and conditions in Europe have hit the German economy much harder than the U.S. economy.

At the same time, inflation expectations have moved sharply higher in March. For the euro area, the reading was -35.1 in February, rising to 69.5 in March. The German index in February was at -37.5; that's moved sharply higher to plus 70.2 in March. In the U.S., the index moved from -36.2 in February to plus 50.6 in March. The war came and the sanctions have been imposed and these are turning the entire economic picture inside out and upside down. The ZEW index shows a combination of dramatic and benign changes.

Markets continue to trade- did they simply discount everything? We usually expect markets to be the litmus test of economic events. But strangely the impact on markets according to the ZEW experts has been muted - in the survey at least. Euro area short-term interest rate expectations were at 50.3 for February and they have eroded only slightly to 47.2 in March. For the U.S., short-term rate expectations of 88.7 in February have become 86.7 in March.

The impact on long-term rates sees the German index going from 74.2 in February to 76.5 in March whereas the U.S. index moves from 78.0 in February to 81.5 in March.

Stock market survey shows reduced expectations but not dramatically so. In the euro area the stock market expectation index moves from a survey value of 32.9 in February to 22.1 in March; in Germany it drops from 34.8 in February to 21.4 in March; in the U.S. it barely budges moving from 28.5 in February to 27.3 in March. Of course, the stock market standings all are weak.

Summary Table: Stronger vs. Weaker The summary table show the economic situation weakening in the euro area, Germany, and the U.S. in March. Economic expectations weaken in Germany and the U.S. in March. Inflation expectations rise across the board for the euro area, Germany, and the U.S. Short-term rate expectations are slightly weaker in the euro area and the U.S. while long rate expectations are slightly stronger. For stocks, assessments are slightly weaker but not very dramatically. The survey shows dramatic shifts in economic variables and slight wiggles in market gauges.