Economy in Brief

Germany is HICP inflation measure (12-month) came in at 2% in June, below its May reading 2.1% but above its April reading of 1.9%. There have been a few recent readings for Germany at 2% or below and these are the first traces of 2% inflation in Germany since mid-2021 when inflation first began to climb above the 2% target that is the objective by the ECB for all of the European Monetary Union.

Inflation progress is evident The German domestic CPI is also up by 2% year-over-year, and this is the fifth time that it has posted an increase of 2% or less since August 2024. This is good news because it suggests that German inflation isn't just flirting but perhaps trending and will eventually stabilize around the 2% mark. However, Germany also still has work to do because the domestic CPI gauge excluding energy in June is still at 2.5% year-over-year; that pace dropped from 2.8% in May and it's generally been higher over the past year with some fluctuations up as high as a 3.1% year-over-year pace, as was the case in December. But it's also been as low as 2.6% in August of last year. Core inflation in Germany remains stubborn. We see that clearly from its domestic CPI excluding energy reading. The core reading in the HICP series is not yet available for June but the core reading from May came in at 2.9%, an acceleration from 2.8% in April.

Sequential inflation The sequential inflation readings in this report are quite good for domestic inflation, and even for the ex-energy reading, but not quite as good for the HICP which is the measure of inflation used by the European Central Bank. German HICP inflation is 2% over 12 months, drops to 0.9% over 6 months, and then the annualized rate rises to 2.2%, again, over 3 months. For the domestic measure of inflation, the annualized CPI rates are 2% over 12 months, 1.5% over 6 months and 1% over 3 months - a clear decelerating pattern. That decelerating pattern is echoed for the domestic CPI excluding energy which is at 2.5% over 12 months, 1.7%. over 6 months and 1.3% over 3 months.

Inflation Diffusion -monthly Inflation diffusion, which calculates the breadth of inflation for the domestic CPI, shows diffusion of 27.3% for June, 54.5% for May, and 18.2% for April. The June and April readings clearly point toward more decelerating than accelerating inflation as they are below the neutral 50% mark. The May report suggests just slightly more acceleration than deceleration at 54.5%.

Sequential Diffusion Sequentially, diffusion over 12 months, 6 months and 3 months gives us readings below 50% on each horizon which is good because that points to inflation decelerating rather than accelerating. However, the diffusion readings are consistently rising from 18.2% over 12 months, to 27.3% over 6 months, to 45.5% over 3 months – and moving more toward diffusion neutrality.

Weak oil has been a tailwind for lower inflation Inflation progress has been helped along by weak oil prices in June. Brent oil prices measured in euros rose by 6.7%; they had fallen by 4.1% in May and by 10.7% in April. These are month-to-month calculations. Sequentially, Brent oil prices fell by 20.7% over 12 months, they fell at a 23.4% annual rate over 6 months, and they're falling at a 30% annual rate over 3 months. All of these metrics should have helped the inflation numbers to look more contained. When inflation falls over a relatively long period of time, it also has a chance to permeate non-energy measures and cause even non-energy inflation to edge a little bit lower. For now, weakness in oil prices has been a tailwind for German inflation progress.

The current and future economy watchers indexes advanced in June. In the current index, only services, housing, and employment readings weakened. In the future index, the reading for corporations weakened based on weakness for nonmanufacturing corporations. However, the improvement signaled is still quite downbeat since it only indicates that the ongoing deterioration is slower. The diffusion readings continue to be below 50, indicating pullbacks across all categories are still in train and are only letting up slightly.

While the improvements in the month-to-month readings were widespread, they were mostly small and no reading in either the current or the future survey has a diffusion value above 50%. That means that all these economy watcher readings are actually showing deterioration although on the month the rate of deterioration slowed across most category readings. In fact, there are no month-to-month readings at or above 50 in either the current or future survey in the last three months. To get a category reading of 50 or higher, we must go back to February when the reading for future employment was 50. We go back to August 2024 to find a majority of future sector reading at 50 or higher and to March 2024 to get a majority of current readings above 50.

The far-right hand column assesses the level of the June diffusion readings vs. past readings back to 2002. On that 23-year timeline, all the current and future readings have percentile standings below the 50% mark leaving all of them below their respective median readings for the period.

In the current survey, retailing and nonmanufacturers with diffusion percentile standings in their respective 41st percentiles have the strongest queue readings. The weakest reading in the current survey are the 21st percentile standings for housing and for employment.

For the future survey percentile readings, the strongest is a 45.5 percentile standing for eating and drinking places. The weakest future reading is the 24.5 percentile reading for employment.

Seeing such weakness in the current and future indexes in employment a reading that is a lynchpin for all sectors is clearly not reassuring.

At the bottom of the table, there are collected results for monthly data on month-to-month changes on the breadth of improvement. We see monthly that after a poor performance in April with most reporting categories worsening, May and June show most of them improving month-to-month on the order of 70% to 100%. Similar metrics for three-month and six-month changes perform much worse. These calculations are executed on changes in averages the twelve-month and average six-month and average 3-month data. On those comparisons, we see average diffusion is up broadly over 12 months compared to 12-months earlier. But the averages over six months and over three months are showing declines across all categories.

While the monthly data are showing some month-to-month improvement, the broader data show that the pace of improvement linked to broad averages is still not in place. And it is still a nefarious since of ‘improvement’ for the overall readings in which the diffusion data are only signaling that the categories are getting worse at a slower pace. Japan continues to struggle with weakness as the Bank of Japan wrestles with inflation and the United States and Japan spar over tariffs.