Euroland Stunned by Expensive Energy

July 17, 2008

In May, Euroland energy prices jumped by 2.5% m/m.  Although the rest of the Bloc’s CPI went up just 0.1% and 1.8% y/y, total consumer price inflation accelerated to a new high of 4.0% y/y from 3.7% in May and 3.3% in April.  Increasingly, just energy — and not both food and energy — is propelling inflation higher.  German food price inflation at the retail level decelerated from 12.9% at a seasonally adjusted annual rate in the second half of 2007 to 4.4% in the first quarter of 2008 and just 0.7% saar in 2Q08. 

Energy is clobbering demand and output in the meantime.  Euroland industrial production sank 1.9% in May and was 0.6% weaker than in May 2007.  The energy component of the production index fell 2.7%, but weakness spilled over into a wide range of manufactured goods, with decreases from April amounting to 2.4% for capital goods, 3.3% for consumer durables, 1.2% for other consumer products and 1.4% for intermediate goods.  The big drop in overall output was also spread widely across countries, including 2.6% each in Germany, France and Spain, 1.4% in Italy, 6.0% in Holland, 5.7% in Portugal and 4.5% in Greece.  German exports fell 3.2% in May, resulting in that economy’s smallest seasonally adjusted trade surplus since February 2007.  Analysts had been bracing for recessions in Spain, Ireland and possibly Italy.  Now France and Germany are exhibiting more softness than had been anticipated.  Wouldn’t it be ironic if Euroland, Britain and Japan, but not the United States, experience recessions?   If that happens, politicians in Europe will point to the disparate policy reactions of the Fed with its rapid and deep interest rate reductions, which contrasts with the ECB’s upside rate bias and emphasis on containing fuel-injected inflation.



Comments are closed.