Economy in Brief: June 2022

Producer price inflation in the euro area in April rose by 1.9% month-to-month. Capital goods prices rose 1%, consumer goods prices rose 2.4%, month-to-month, while intermediate goods rose by 3.7%. Month-to-month manufacturing overall prices rose by 2.3%.

PPI inflation in the euro area has been exceptionally high. It reaches 37.2% year-over-year with a six-month annualized rate at 43.3% and a three-month annualized rate at 43.6%. These are tremendous gains and accelerations. If we compare inflation over the last 12 months to what it was one year ago over the previous 12-months, inflation accelerated to a 37.2% pace from 7.6% in April of one year ago.

And what’s more it has done that without the ECB batting an eyelash…

One year ago, inflation was mostly a factor in the intermediate goods sector where inflation rose by 7.1% year-over-year. Consumer goods inflation had risen by 1% over 12 months; capital goods inflation was at 1.5% over 12 months. These are the 12-month increases from April of one year ago and they've accelerated extravagantly since that time.

Across the euro area inflation remains high and various reporting countries (see Table for EMU and EU countries) show year-over-year inflation that ranges from a high of 62.4% in Ireland and in Denmark (Denmark being an EU member) to as low as 22.2% in Sweden (an EU member). Finland, an EMU member, also has a ‘relatively’ low rate for the Monetary Union at 24.9%.

Year-over-year inflation accelerates in all the countries in the table. Over six months, inflation accelerates in 92% of the countries in the table. Over three months, inflation accelerates in 77% of the countries in the table. Inflation has simply been accelerating and continues to do so even from exceptionally high existing levels of inflation.

During this period, the European Central Bank has been in denial and earlier this year Christine Lagarde, the head of the central bank, was saying that it was unlikely the policy would be reacting and raising rates this year. She has had to recant that statement and the ECB is now on a path to begin securities sales and rate hiking sometime between July and September of this year. With PPI inflation at 33% year-over-year in Germany and accelerating to a 46.7% pace over three months, the Germans are clearly apoplectic about inflation pressures. The ECB was supposed to be modeled after the Bundesbank and was given a charter that was supposed to give it similar insulation from political pressure, but it hasn't worked out that way – has it?

In May, most of the manufacturing PMI indicators in the table for a sample group of 15 countries showed some backing-off from April levels. Nine of the 15 entries in the table are weaker in May, the same number is in April and those totals compare to 11 weaker in March. The graph for select countries shows a gradual reduction in the S&P global manufacturing PMI indexes overtime for the United States, China, and the EMU.

Looking at the sequential metrics, the averages over 12 months, six months and three months reveal that over 12 months seven of the entries show worsening conditions while eight saw improving conditions. Comparing six-months to 12-months, there are four entries showing improving conditions with 11 showing worsening conditions. Comparing three-months to six-months, there's an overwhelming worsening with only three entries showing month-to-month improvement; those are for the U.S., Canada, and Brazil.

We can also look at PMI rankings for the full data period; two of them are suggested in the table, one is the high/low percentile ranking that positions the current observation between the highest and the lowest values in the sample (back to January 2018). While that metric can be useful, it is a metric that is derived from only three observations. I prefer the other measure, the queue rankings, which position the current observation in the full sample of data available expressing the result again as a percentile standing (Rank % or Queue %). Viewed in this way, only Vietnam has a top ten percentile standing with a 90.6 percentile metric in May while Turkey, China, Taiwan, and Germany have percentile metrics that rank below 50% putting them below their respective medians for the period. Still, Germany is close to its median. Turkey is somewhat farther below its median and Taiwan is weaker still, but China has the lowest relative reading in the table with a 5.7 percentile standing – a standing that has been lower since January 2018 less than 6% of the time.

The far-right hand column measures the total gain in the current manufacturing index compared to February 2020 before the virus struck. Only Turkey has yet to get back to that level although India and Taiwan have barely gotten back to those respective marks. Manufacturing sector recovery under COVID has been the most successful for China and Germany, followed by the U.S.