Previewing Euroland Producer Prices in June

July 30, 2008

Producer prices advanced 7.1% in the year to May, the most since such data began to be collected in 1990.  June figures, which get released on Monday at 10:00 GMT, will show an even higher on-year PPI inflation rate of about 7.8% despite a lower monthly increase than May’s 1.2%.  I expect a 0.8% monthly rise, still very brisk and still propelled mainly by energy.  Energy producer prices posted monthly increases in Germany, France and Italy of 2.6%, 2.1% and 2.0% and 12-month increases in those respective economies of 17.9%, 22.0% and 23.8%.  Non-energy PPI inflation in Euroland will be near 4% compared to 3.2% at the end of 2007.

An early flash estimate of July CPI inflation is due tomorrow.  Consumer price inflation doubled from 1.9% in June 2007 to 4.0% in June 2008, with more of this acceleration happening since December’s print of 2.5% y/y than during 2H07.  Germany and Belgium have already reported July CPI figures.  Consumer price inflation remained steady at 3.3% in Germany and edged up a tenth to 5.9% in Belgium.  These results suggest a 4.1% inflation rate in Euroland as a whole.

It is too early for the price-stability-oriented ECB Governing Council to consider a rate reduction.  Neither PPI nor CPI inflation have crested.  The recent sharp drop in commodity prices and lower rates of money and credit growth are encouraging but not definitively so.  Previous big drops in commodity prices since 2003 were temporary, and money and credit levels remain far too elevated.  The 4.25% refinancing rate is very low relative to inflation that is also in the low-4’s.  By comparison, a cyclical German CPI peak in 1992 of 4.8% was associated with a cyclically high Bundesbank rate high of 9.75%.



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