Central banks still brush it off as just “temporary.”
By Nick Corbishley for WOLF STREET:
Producer prices of German industrial products in March rose by 0.9% from February, after having risen by 0.7% in February from January, and after having spiked by 1.4% in January from December, the biggest month-to-month jump since 2008.
Compared to March last year, producer prices jumped by 3.7%, according to the German Federal Statistics Office (Destatis), the biggest year-over-year jump since November 2011. The surge began last fall, after sharp declines earlier in the year:
Part of what caused the 3.7% increase from March last year — but not the surge over the past few months — is the “base effect“, since in February and March last year the producer price index was declining, and the latest year-over-year results are measured from those low points.
But factory prices have been rising on a month by month basis for the seventh straight months — with large increases over the past three months. And that has nothing to do with the base effect.
Prices of intermediate goods jumped by 5.7% year over year in March, the fastest since July 2011, due mainly to sharp rises in the price of secondary raw material (47%) and prepared feed for farm animals (16%). There were also increases in durable consumer goods (1.4%) and energy (8%), which in large part were driven by a sharp increase in electricity prices (9.6%).
Producer prices are now rising fast in the major manufacturing economies.
In China input costs rose 4.4% in March from a year earlier up from a 1.7% increase in February. It was the sharpest rise since July 2018. As the world’s biggest exporter, China’s rising prices stoke inflation around the world.
Inflation dynamics are mounting due to a constellation of reasons, including a global economic recovery fed by historic amounts of fiscal stimulus — unprecedented growth in government spending and borrowing — central bank money-printing, supply chain shocks, shortages and distortions, rising shipping costs, and surging demand for certain commodities and consumer goods in developed countries, particularly the US.
Surging commodity prices in China have already caused consternation among top policy makers. The Financial Stability and Development Committee recently called for efforts to stabilize prices. Authorities should “keep a close eye on commodities prices,” the committee said earlier this month.
China has long been exporting lower prices, with goods being manufactured more cheaply there than in the US and other developed markets — the much touted benefit of globalization that led to rampant offshoring in the US and Europe as Corporate America and Corporate Europe invested in China and other cheap countries, instead of at home. But that has now come to an end: Exporters of deflation have turned into exporters of inflation.
In the US, producer prices have taken off. Compared to March last year, the PPI jumped by 4.2%, the sharpest year-over-year increase since 2011. And the Consumer Price Index is starting to follow, though the Federal Reserve has promised to dismiss the jump in inflation by blaming it on the “base effect” and “temporary” factors.
In Germany, a variety of factors, including looser-than-ever ECB monetary policy and the termination at the end of last year of reduced valued added tax rates, have suddenly pushed the consumer price index up by 1.7%. Inflation is also surging in neighboring countries, reaching 1.9% in the Netherlands and 2% in Austria. But in the more depressed economies of Southern Europe, inflation is lower, at 0.5% in Portugal and 0.8% in Italy.
Concerns are rising that inflation could once again be rearing its ugly head. In Germany, inflation is now expected to reach 3% to 4% later this year, including by Bundesbank President Jens Weidmann who, in an interview in February, already predicted that inflation would be above 3% by the end of the year.
“One thing is clear: the inflation rate will not remain as low as last year permanently,” he noted, adding that the ECB will only be able to make monetary policy adjustments once inflation rates jump. And he exhorted the ECB to act when consumer price inflation takes off: “There must not be a lack of determination, even if the financing costs for highly indebted countries rise.”
But the ECB is focused on keeping the Eurozone glued together, with an eye toward the southern member states. And with three of its four largest economies — France, Italy and Spain — shouldering public debt loads of 115%, 120%, and 156% respectively, even a small rise in the ECB’s benchmark interest rate, which has been negative for years, could prove too much for them.
At least in the short term, the ECB will continue with its easy-money policy. On Thursday, ECB president Christine Lagarde reiterated that increased inflation this year would not prompt the ECB to tighten policy, that any increase would be seen as the result of “idiosyncratic and temporary factors,” and that underlying inflationary pressures “remain subdued.”
But the surging producer prices in exporter nations, such as Germany and China, and even in the US is beginning to translate into a widespread surge of consumer price inflation. In some countries, this has already taken off on a large scale, including in Brazil, Mexico, and (as always) Argentina, Turkey, and Russia. And those jumpy inflation rates have led to shock-and-awe rate hikes in some of those countries. By Nick Corbishley, for WOLF STREET.
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