What happens to inflation? In Germany it rises, while in France, Italy and Spain it falls. And what does the ECB do? To fight against inflation, he will continue to raise rates… Giuseppe Liturri’s analysis
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We haven’t seen such different country-to-country inflation measures in the eurozone for some time. After years in which Germany has been the standard bearer of wage moderation, with consequent significant gains in competitiveness towards its European partners, the data arrived between Wednesday and Friday describe a different world for us. It is Italy and Spain that have lower inflation than Germany. But not only that, the two Mediterranean countries have a downward trend, while Germany showed a slight rebound in June.
On an annual basis, the harmonized inflation index in Berlin rose from 6.3% to 6.8%, in Madrid it fell from 2.9% to 1.6% and in Rome from 8% to 6.7 %. Inflation excluding food and energy (so-called “core”) was respectively equal to 5.8% (5.4% in May), 5.9% (6.1% in May), 5.6% (5.8% in May).
I arrived today French data which, in the wake of Italy and Spain, confirm the downward trend of inflation, with the harmonized index falling to 5.3% in June (6% in May).
A few hours later the data relating to the Eurozone were published, where inflation fell to 5.5% (from 6.1% in May). The figure excluding food and energy stood at 5.4% from 5.3% in May. A sign of a persistence of the inflationary phenomenon especially in the services sector.
Numbers that further complicate the already difficult task of the ECB in managing interest rate hikes. What inflation will those hikers have to fight? The German one? But why also hit France, Spain and Italy? These are just the latest knots in the roost, which for more than 20 years has been intercepting all the structural contradictions of the Eurozone.
But why are there such significant and different variations between these countries? It almost all depends on how they managed the interventions to mitigate the impact of the energy crisis that started in autumn 2021 and then exploded in the spring-summer of 2022 due to the Russian invasion of Ukraine.
For example, in Germany, exceptional discounts were granted on rail transport between June and August 2022, and therefore today it is normal that, compared to those low price levels, there is a slight increase.
Therefore, the ECB should not draw reasons for further rate hikes from the German data. Spain, not dependent on Russian gas and with significant supplies from North Africa and by ship with LNG, was among the first countries able to contain the impact of energy price increases. And here today it records widely negative variations in the prices of energy products, capable of drastically lowering the general index.
In Italy, the zero change in June over May in the national NIC index is the result of the upward thrust of significant changes in food products, services related to housing, the hospitality and catering sector and the furniture and household items sector. the House. All other spending divisions grow less than the general index.
Looking at the trends by product type, the drop in non-regulated energy products stands out. Foodstuffs are still growing by double digits (+11%, from 11.4%), a drop that hides the compensation between the increase in unprocessed ones (+9.6% from +8.8%) and the decrease in those processed (+11.9%, from +13.2%). It is comforting that inflation in the services sector is starting to show signs of slowing down, as it has been happening for all goods for some time now.
It’s even more interesting to put things in perspective. In fact, if there were no monthly variations in the coming months, as happened in June, in October we could already measure inflation equal to 1.4%. As happened in Spain and therefore well below the target set by the ECB.
It is the power of the base effect. In fact, the annual variation will be measured with respect to a base price index which registered a significant increase last October, and therefore that “step” in October will no longer be read.
We are therefore in a situation in which the “engine” of energy prices, which had set off the long wave of increases in other goods and services, has shut down and that, with a physiological delay, this last long wave is also running out. Of course, pockets of resistance still remain in some services (catering, hospitality, housing) where competition struggles to operate as a leveling factor, but it really seems that, barring other external shocks, the price spiral has stopped screwing upward.
Now the ball is with the ECB. Who continues to show off his muscles while looking at the economy in the rear view mirror. In fact, after a 400 basis point increase in rates in less than twelve months, the manufacturing sector in Europe has come to a standstill and, as mentioned, the prices of services are also finding a new equilibrium. So what’s the point of raising rates further, assuming and not assuming that they are fully effective in the face of price increases triggered by an exogenous price shock that has receded but whose consequences on other sectors must now be managed? Perhaps to make people forget that they stayed asleep until July 2022, after 10 months of cyclical changes that were considered “transient”, only to realize months later that the price shock had spread to all sectors of the economy?
The ECB risks acting like that referee who – to compensate for a denied penalty – assigns a non-existent one. But unfortunately we are not playing football.
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