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INFLATION
This section gives a rapid run down of the statistics on price trends in the euro zone.
It concludes with consensus and Euroeconomics inflation forecasts for 2011 and 2012.
IN THIS SECTION:
Consumer price increases
Producer prices
Purchasing Managers' survey of prices
manufacturing
services
S U M M A R Y (updated 17 Jan'12)
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Inflation:
modest deceleration underway After accelerating to 3% in the autumn, Dec'11-Jan'12 brought a dip to 2.7%. Energy prices remain the most inflationary factor. Though producer price increases have flattened out, the depreciation of the EUR is a new inflationary factor bound to slow further declines in the inflation rate. Against the recessionary backdrop it is widely expected that inflation will fall below the ECB's inflation target in the course of 2012. But this has become less and less likely. Militating against such a steep decline in inflation is the sharp rise in unit labour costs, persistently high oil prices, the depreciation of the EUR and the likely upturn in commodity prices once global growth gathers momentum. Another factor potentially keeping consumer price increases high is a hike in VAT (included in the consumer price index) so as to reduce taxes on labour (not included in index). See forecast details |
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The latest inflation statistics give only partial support to the consensus forecast of a steep deceleration in the euro zone's inflation rate:
In Jan'12 the annual inflation rate stabilised at 2.7%. more
Industrial producer prices are easing. In Dec'11 they declined by 0.2% on the month. Ex-energy producer prices declined by 0.1%. more
The Purchasing Managers' Jan'12 surveys indicated that prices rose in manufacturing.
In the services sector input prices continue to rise while prices charged edged lower. moreCommodity prices, which plunged as global recession fears intensified, are strengthening as global growth indicators improve. more
Oil price in EUR is currently above its previous peak reached in Apr'11 (monthly average). more
Hourly labour costs increases decelerated modestly in Q3'11. more
Unit labour costs again rising rapidly as growth falters. more.
Feb-Mar'12 inflation indicators due:
22 Feb Purchasing Managers' Jan'11 price survey 1 Mar Consumer price index Feb'11 flash
2 Mar Industrial producer prices Jan'1214 Mar Consumer price index Feb'12 final
15 Mar Hourly labour costs Q4'11
CONSUMER PRICES
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Consumer Prices:
easing to 2.7% Jan'12 (flash): 2.7% y/y published 1 Feb; Feb'12 flash due 1 Mar, final due 14 Mar. Core rate Dec'11: 2.0% y/y; published 17 Jan; Feb'12 due 14 Mar. Source Eurostat |
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Inflation in
Jan'12:
The annual inflation rate remained at 2.7% according to
flash estimate. |
Another, less noticed, inflationary factor is unit
labour costs which have been rising steeply (see
below). |
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Inflation
rates by country |
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Countries with inflation rates below average |
Countries with inflation rates around average |
Countries with inflation rates above average |
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Ireland
1.6 |
Netherlands
2.7 |
Italy
3.7 |
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Euro area average 2.9 |
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PRODUCER PRICES
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The producer price index in Dec'11 declined by 0.2% on the month. The
trend remains modestly upwards. The decline was due to an easing in energy prices. Excluding energy, producer prices
declined by 0.1%. Since Sep'11 this series has edged lower. Energy prices are on an uptrend and the decline in Dec'11 may prove to be exceptional. The oil price rose in Jan'12 as the EUR depreciated (see below), suggesting that producer prices may begin to edge up again. The earlier steep rise in intermediate goods prices has, however, been reversed, at least for now. Still rising by 1.4% m/m in Jan'11, they have progressively moderated and declined in each of the latest three months (reflecting the easing in commodity prices in 2011, as shown below). But in Jan'12 commodity prices started to rise again. |
Thus the cost push from intermediate goods prices dwindled
in 2011 while weaker growth also contributed to the deceleration. In
any event, as most energy and commodities are imported, the
earlier inflationary push was to a significant extent coming from abroad. Final goods prices, which were stable throughout 2009 and early in 2010, crept up in 2011 as the earlier steep price rises in upstream products (energy, intermediate goods) percolated through to downstream product prices (capital and consumer goods). But this upward pressure has been easing and Dec'11 capital and consumer goods prices were stable. On the year capital goods prices were in Dec'11 1.5% up. Durable consumer goods prices have risen somewhat faster, up by 2.3%. Non-durable consumer prices rose by 3.2%, reflecting dearer food. Overall producer prices indicate very subdued inflationary pressures in the euro zone. This should allow consumer prices to continue to decelerate from the 3% reached towards the end of 2011. But energy and commodity prices are again on the rise and may prevent consumer prices from decelerating below the ECB's inflation target. |
In terms of annual rates of change the total industrial producer price index was in Dec'11 up by 4.3%, that of the series excluding energy by 2.6%. (chart below).
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SURVEY OF PRICES
COMMODITY PRICES
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Commodity prices:
boosted by positive global growth indicators The Economist commodity price euro index 31 Jan'12: 181.2 (previous 24 Jan'12: 181.0) |
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Recent:
Commodity prices were in quite steep decline for
much of 2011 on weakening global growth indicators.
The depreciation of
the EUR in H2'11 prevented a steeper decline in terms of
euro. Nov-Dec'11 brought more modest declines as growth indicators for the US and some emerging markets became somewhat more positive. Further gains in growth indicators brought a rise in Jan'12. Prices in EUR were for a while additionally boosted by the depreciation of the EUR. End Jan'12 commodity prices in EUR were some 13% below year-before levels. Compared to their peak in Feb'11, prices are 15% down. |
Earlier:
War in Libya and the nuclear accident in Japan were seen
as possibly severe setbacks for global growth and
brought an end to the steep rises in commodity prices. The declines in early summer were steepened by more and more growth indicators pointing to a slowdown of the global economy. It was considered that the explosion of prices in the months to Feb'11 was accentuated by speculative buying and prices had risen by more than what was justified by fundamentals. For commodity price index forecast see below |
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Recent: The weakness of the EUR in Sep-Oct'11 meant that the steep
decline in the oil price in terms of USD was only
partially reflected in the oil price in EUR. In Nov-Dec'11 the oil price was back on a rising trend, the result of seasonal demand for heating oil, hopes of a strengthening of global growth, low inventories and fears surrounding Iran's nuclear developments. |
For the euro zone the progressive
weakening of the EUR brought a steep rise
in oil prices at the turn of the year. But early in
Feb'12 the EUR had recouped some of its losses, making
for a more modest rise in the oil price. The price of oil in EUR is now above the average for the Apr'11 peak month and is 13% up on Feb'11. |
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Background: After its collapse in 2008, the
oil price gave unexpected signs of strength in 2009. The
rise in its price was aided by OPEC cutting back production by some 5 million barrels a day, eliminating the
surplus oil which arose as the developed countries sunk into
recession. (This boosted OPEC spare capacity which, some thought, may limit further price increases.) Oil consumption rose again in 2010 and H1'11, quite steeply in the newly industrialising countries where it never declined. As real investment in oil producing capacity was static in the noughties (investment rose in nominal terms, but this was because of rapidly rising investment costs), there were renewed fears that the world may soon again come up against a shortage of oil producing capacity. |
In 2010 stocks and production capacity
still appeared ample. During the summer months oil output
rose in Canada and
Russia while fears of slower global growth kept demand in check. Towards
end-2010, however, increasingly buoyant global
growth indicators brought a resumption of the steep
uptrend. By year end the oil price exceeded USD90
per barrel. Unrest in the North African and Middle
East oil producing countries gave the oil price another violent heave in
Mar-Apr'11. Apr'11 proved the peak month for oil prices. Growing fears of a global growth slowdown or even a renewed recession set the oil price on a declining trend which reached its low point early in Oct'11. Since prospects of a recovery as well as Iran's nuclear ambitions brought a return to the rising trend. |
LABOUR COSTS
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Hourly labour cost: moderating The annual hourly labour cost increases, which decelerated steeply in 2009-10 under the twin pressures of high unemployment and low inflation, turned up quite sharply in H1'11 as inflation accelerated and the labour market firmed again. As the tide turned Q3'11 brought some deceleration. Labour costs were up by 2.7% on the year, decelerating from 3.3% in Q2'11. The wage component in labour cost increases lagged total labour cost increases (which also include employer social security contributions and employment taxes). Q2'11's 3.2% y/y rise in wages exceeded the rate of inflation in that quarter of 2.8%, but not by much. The improvement in real disposable income was modest. This was followed by a negative outcome in Q3'11. Wages rose by 2.6%, inflation by 2.7%, leaving no room for real gains. By sector: decelerating in industry The steepest acceleration labour costs in H1'11 was recorded in industry. It is also the sector with the steepest deceleration since. Annual hourly labour cost increase in Q2'11 of 4.2% have been reduced to 2.9% in Q3'11. In the services sector labour cost increases are at 2.6% (down from 2.9%) and in construction they are at 2.4% (down from 2.5%). By country: moderating in core Europe, mixed in periphery In Germany Q2'11 labour costs rose by 4.5% y/y, a steep acceleration from the low of 0.2% seen a year earlier, as trade unions successfully pressed for higher wages after the steep recovery of the economy and of corporate profits. In industry the rise was as much as 6%, in services a lesser 4%. Q3'11 brought a moderation to 3% overall and to 3.6% in industry. |
Most other core Europe countries also saw some moderation in Q3'11, e.g. France to 3.1% (from3.4%), Belgium to 2.6% (2.8%), Netherlands 1.9% (2.0%). Among the bailed out countries labour costs are mixed. In Ireland labour costs have been declining steadily since Q3'10 (Q3'11: -1.1% y/y). In Greece labour cost declined sharply, averaging 6% in recent quarters (though coming after double digit increases earlier). In Portugal the declines have been modest and irregular. In Q3'11 labour costs even rose by 1%. Among the other deeply indebted countries deemed uncompetitive, Italy has seen wage increases falling somewhat below the euro zone average in recent quarters, after rising above average in 2009-10. In Spain wage increases have been below the euro zone average for longer, but also after being above average earlier. In Q3'11 they even accelerated above the euro zone average. Thus little progress in improving competitiveness. See constitution Unit labour costs: probably now rising rapidly Throughout 2010 unit labour costs edged lower as output rose without any increase in employment and salary and wage increases remained modest. In Q1'11 unit labour costs were still little changed on the quarter. On the year they rose by only 0.2% as output rose steeply. But as growth slowed in Q2-Q3'11, unit labour costs started to increase. Q4'11 may bring a steep increase as growth probably went into reverse while it will take some time before wages adjust fully. |
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The annual rises in unit labour costs then decelerated steeply from Q2'09 as jobs were eliminated and output started to expand again. In 2010 unit labour costs declined by 1% as output rose without a corresponding rise in employment (boosting corporate profits on the way). Though in those countries where employment had been supported ("labour hoarding"), the decline in unit labour costs was more limited. |
Unit labour costs increases varied widely by country As indicated in the chart below, unit labour cost increases varied widely by country since the start of the monetary union in 1999, giving rise to loss of competitiveness of the Mediterranean countries as well as Ireland and contributing to the sovereign debt crisis. (Unit labour costs (ULC) measures the average cost of labour per unit of output. The standard formulation of unit labour costs is to divide compensation per employee by productivity, measured as GDP per worker.) |
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INFLATION FORECASTS
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Inflation:
moderate declines
(revised 5 Jan'12) Factors making for moderating inflation: ample spare capacity, high unemployment, lower commodity prices Ample scare capacity, particularly in the labour market, is the major reason for expecting moderating inflation in 2012-13. The steep deceleration in global growth in Q3'11 brought declining commodity prices. This should contribute to the deceleration in consumer prices. Under pressure from still high unemployment, wage increases can be expected to moderate again. Once output grows again in 2012 unit labour costs will decline. This will allow companies to reap higher profits without having to raise selling prices by much. The ECB has staked its reputation on respecting its inflation target, though since the departure of ex-President Trichet a less dogmatic attitude may prevail. |
Factors
restraining the decline in inflation: energy
prices, emerging countries, VAT The enduring voracious demand for commodities from the world's newly industrialising countries, only briefly dented by the 2008/09 financial crisis, accounts for the rapid recovery in commodity prices in 2009 and the continued steep rise in 2010 and in the early months of 2011. Though heading lower since as a result of the global slowdown, the decline appears to have bottomed out as growth in the US and in the emerging countries strengthens again. Oil prices have been particularly strong. Progress made by the emerging countries means that the developed countries no longer "import deflation" from them. The prices of the exports of the newly industrialising countries are now rising from earlier low levels and the developed countries are now more likely to "import inflation" from them. Declining EUR, rising VAT A new element in the inflation outlook is the weakness of the EUR. The depreciation of the EUR for much of 2010 contributed to the subsequent acceleration in euro zone inflation. Also countries seeking to reduce budget deficits and reducing taxes on jobs are raising VAT. |
HICP.jpg) |
Weak growth and the recent declines in commodity prices
make forecasts of lower inflation in 2012
credible.
But for the lower
forecasts to be realised oil and commodity prices
may have to at least stabilise. Recently oil
prices have again surged. VAT is being hiked
in various countries. |
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Commodity markets: prices to
recover in 2012 (reviewed 9 Dec'11) The steep 2009-10 uptrend in commodity prices was initially reversed by the upheavals in North Africa/Middle East. The disasters in Japan in Mar'11 brought further losses. After stabilising in mid-year, the downtrend resumed on weak global growth. After consolidation in Q4'11 at a lower level the uptrend is forecast to resume in 2012 as global growth gathers momentum.
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Some background:
Real commodity prices were on a declining trend for
the quarter of a century to 2000. Commodity prices
stabilised in the first half of the noughties,
followed by three years of steep rises thanks to the
new demand from the emerging countries. Per capita
consumption of commodities in developing countries
is still only a fraction of the level in developed
countries. A lot of catching up still lies ahead. Supply for many commodities is slow to adapt to the increase of demand due to long lead times. The 2008-09 recession and the associated difficulty of securing capital have brought further delays to capacity expanding projects. |
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