Tuesday, June 24, 2008

Eurozone Inflation May 2008

Inflation in the euro zone accelerated to 3.7 percent in May, the highest rate recorded since the launch of the euro, and clearly adding to the arguments inside the ECB for an interest rate rise in July.


Inflation accelerated in May in Germany as the cost of oil hit ever higher levels. Consumer prices, according to the European Union harmonised methodology, was up by 3.1 percent year on year, according to data from the Federal Statistics Office. That's slightly above the initial estimate of 3 percent made on May 28. Month on month prices rose 0.7 percent.

Oil prices reached a record $139.12 a barrel last week and European Central Bank President Jean-Claude Trichet indicated that the ECB may raise its benchmark rate by a quarter-point to 4.25 percent next month to contain inflation.

German inflation has now exceeded the ECB's limit of a rate "close to but below 2 percent" for over a year and even the strong appreciation in the euro has failed to offset higher oil and food costs. While the euro rose 8 percent in trade-weighted terms over the past year, oil prices doubled.

The price of fuels rose as much as 12 percent from a year earlier. Diesel jumped 26 percent and the cost of light heating oil surged 57 percent in May, the statistics office said. Food prices rose 7.9 percent compared with May 2007.

ECB policy makers have been becoming increasingly concerned that inflation expectations are on the rise. Expectations, as measured by the so-called breakeven on five-year French inflation-indexed bonds, were at 2.4 percent today, up from 2.12 percent in March.

The ECB currently predicts inflation in the euro region will average about 3.4 percent this year and slow to 2.4 percent in 2009. Economic growth is forecast to slow to 1.8 percent in 2008.

So while economic growth is cooling in EU countries, the ECB remain focused on price stability, and investors now expect the ECB to lift its repo rate twice this year, taking it to 4.5 percent, according to Eonia forward contracts.

However, according to the latest data from the German statistical office wages were rising at a slower rate than inflation in the first quarter of 2008, since employers in the industry and service sectors paid a calendar-adjusted 1.7% more for one hour worked than in the same quarter a year earlier. The two main components of labour costs showed different trends: The increase in gross wages and salaries accelerated slightly to 2.3%. However, non-wage costs declined 0.1%, which had a downward effect. This trend reflected above all the change in the rate of employers’ contributions to the unemployment insurance scheme. As of 1 January 2008, the rate was reduced from 2.10% to 1.65%.


The rate of inflation as measured by Spain's consumer price index was up again in May, at 4.7% according to the flash estimate, while the producer price index rose at a 7.2% annual rate in April according to the latest data from the National Statistics Office (INE). This situation is now most difficult since the economy is evidently slowing rapidly (see the most recent retail sales, industrial output and new mortgages data which are in the posts which accompany this one) yet inflation is actually accelerating. Spain is now entering a period of very pronounced stagflation with little certainty over the likely short term evolution of this whole situation. ie things are obviously going to get worse, but how much worse and how rapidly, and when the inflation eventually buckles under the weight, what will then happen to prices if the euro remains strong? As I say, a lot of unknowns here.

Consumer Inflation

The HICP annual inflation is expected to be 4.7% in May 2008, according to the flash estimated issued by the INE. This index provides a preview of the HICP that, if confirmed, would imply a five-tenths increase on the annual rate, since in April this change was 4.2%. The INE issues this indicator with the aim of incorporating it into the calculation of the HICP flash estimated of the European Monetary Union (EMU) published by Eurostat. Obtaining this EMU flash estimated forms part of the Eurostat and European Central Bank policy of offering timely and quality data that is comparable with that produced by the United States.

Producer Prices

In April, the Spanish Producer Price Index registered a 0.8% increase with respect to the month of March 2008 and an increase of 7.2% with respect to April 2007. The activities that most influenced this variation were Manufacture of coke and refined petroleum products (28.8%) and Food and beverage products industry (10.5%). By economic destination of the goods, the variation rates as compared with the same month the previous year were 5.3% for consumer goods (3.2% for durable consumer goods and 5.5% for non-durable consumer goods), 2.2% for capital goods, 6.0% for intermediate goods and 16.5% for energy.

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