Germany's September CPI Report: A Clearer Picture of Inflation Trends
Economic news and commentary for September 28, 2023
Germany CPI
Germany’s inflation rate sees a strong deceleration in September thanks to some base effect magic. The CPI was up 0.3% MoM and 4.5% YoY in September, down from 6.1% YoY in August. The slowdown in the annual rate can be attributed to the discontinuation of the German government’s final inflation relief measures including the fuel discount which impacted energy prices and the 9-euro ticket which impacted services prices. Regardless of that, it is notable that this annual increase in headline CPI inflation is the lowest since February 2022 when it was 4.3% YoY.
The discontinuation of the fuel discount relief program last year led to a significant surge in energy prices. As a result, September 2023’s energy CPI inflation has cooled down considerably. From a high 8.3% YoY in the previous report, it plummeted to just 1.0% YoY. This figure now offers a more accurate reflection of the oil and gas price situation, devoid of any distortions caused by government price controls. Unlike energy, food CPI wasn't influenced by the 2022 government relief measures. Yet, it too experienced a slowdown this month. From 13.7% YoY at the start of the summer, it dropped to 9.0% YoY a month ago and now stands at 7.5% YoY. Food inflation has been on a downtrend in 2023 which will likely continue through the end of the year.
Core CPI, which excludes food and energy, also felt the ripple effects of the expiration of government relief measures. It slowed down to 4.6% YoY in September, a drop from the 5.5% YoY recorded in both July and August. Goods prices, influenced by fuel prices, are still up by 5.0% YoY, but this is a significant decrease from the 7.1% YoY of the previous month. However, the most notable revelation from the report is the significant deceleration in services inflation. It dropped by 1.1 percentage points to 4.0% YoY, finally breaking below the 5% threshold where it had been lingering for a while.
Germany's CPI readings had been skewed for a considerable period due to the government relief packages introduced as a countermeasure to inflation. Now, with those distortions out of the picture, two main observations emerge:
Germany's services inflation is currently lower than the overall euro area rate. This suggests that the upcoming Eurostat inflation report will show a significant deceleration in services inflation for the whole euro area, a measure closely followed by the ECB.
Germany's goods inflation, which does include energy and food, stands high at 5.0% YoY. It's not often that we see the goods annual rate surpass the services annual rate these days, but in Germany, this is the case.
One thing that is distorted in this report is how much of the deceleration in the inflation rates across all categories are attributed to the relief package and how much is a result of tighter financial conditions. That means that the monthly rates, which are reported in the final version of the Destatis inflation report, are especially important for September.
Still to come…
10:00 am (EST) - US Pending Home Sales Index
10:30 am - US EIA Natural Gas Report
11:00 am - US Kansas City Fed Manufacturing Index
4:30 pm - US Fed Balance Sheet
7:30 pm - Japan Unemployment Rate
7:50 pm - Japan Industrial Production
7:50 pm - Japan Retail Sales
Morning Reading List
Other Data Releases Today
Australia's retail sales grew 0.2% MoM and 1.5% YoY in August, down from 2.1% YoY in July. Clothing (1.3% MoM) and restaurant sales (0.7% MoM) drove the gains while household goods (-0.4% MoM) and food (-0.3% MoM) sales offset them.
Italy's consumer confidence index fell -1.1 pts to 105.4 in September. Both the current and future climate indexes weakened, down -1.2 pts to 100.2 and -0.9 pts to 113.2 respectively.
The EU Economic Sentiment Indicator edged down -0.4 pts to 92.8 in September, and the Employment Expectations Indicator grew 0.6 pts to 102.4. The consumer confidence index fell -1.6 pts to -18.7, the lowest since April.
Italy's PPI grew 0.5% MoM but was still down -12.2% YoY in August. PPI (ex-energy) was flat monthly but up 0.6% YoY. Consumer goods PPI annual growth still remains elevated at 5.5% YoY, rising 0.2% MoM in August.
EU Economic Sentiment
Eurozone selling price expectations give a mixed picture of inflation outlook (ING) - The Economic Sentiment Indicator (ESI) fell from 93.6 in August to 93.3 in September. This is consistent with sluggish economic activity. Selling price expectations are becoming more benign overall, but some sectors are still giving warning signs that the fight against inflation is not quite over.
US Durable Goods New Orders
U.S. Durable Goods Orders: Core Strength in August (BMO) - U.S. durable goods orders unexpectedly edged up 0.2% in August after taking a 5.6% nose-dive in July. The U.S. economy is proving to be remarkably resilient, while inflation remains stubborn, likely keeping rates high for longer.
New Orders for Durable Goods Rose 0.2% in August (First Trust Portfolios) - Durable goods orders surprised to the upside in August, with growth across
most major categories. The only notable weakness came from commercial aircraft, where a June surge in orders has tempered over the past two months. The decline for commercial aircraft orders (-15.9%) in August was partially offset in the transportation category by rising orders for defense aircraft and motor vehicles & parts.
Durables Look Good From Afar, but Are Far From Good (Wells Fargo) - Durable goods orders exceeded expectations, and a surge in core capital goods shipments will lift estimates for third quarter business spending. Yet after backing out a surge in defense spending and accounting for steep downward revisions, the report gets a lot less exciting.
US
US government shutdown makes it likely the Fed is finished hiking (ING) - The impending government shutdown will be economically disruptive and will restrict the flow of data the Fed will need to see to justify hiking interest rates further. Although the broader market fallout should be limited, a long shutdown would depress treasury yields.
US yield curve sends recession warning to crude oil (Saxo Bank) - Crude oil futures in London and New York continue to attract buying interest as the available supply, especially of diesel-rich crude oil from the Middle East and Russia remain tight as producers keep output well below their respective production ability. The current tightness is increasingly being expressed at the front end of the curve, where the premium for near-term barrels of WTI trades compared to the next month has almost reached 2 dollars a barrel, the highest level in more than a year.
U.S. East Coast Labor Market Pulse Check: Healthier in the South (TD Bank) - U.S. job growth is slowing, and we expect labor market conditions to cool further in the quarters ahead. Zooming in on the East Coast, labor market performance and prospects appear generally softer in the northern half of the region, with job growth recently slowest in New England, followed by the Mid-Atlantic region, although for different reasons.
Resilience and Recovery: Insights from the July 2022 Eastern Kentucky Flood (Cleveland Fed) - Because of its topography, location, and coal mining legacy, eastern Kentucky has a long history of flooding. This report focuses on housing in the 13 counties declared federal disaster areas after the July 2022 flood.
Europe
Careful embrace: AI and the ECB (ECB) - From playing chess to piloting drones – machines have become much smarter and play a role in many areas of our lives. So why not use artificial intelligence for central banking? We are currently using this new technology for some tasks and exploring its future use for others. The ECB Blog gives you an overview.
Czech National Bank review: The rate-cutting strategy is ready (ING) - The bank board has prepared a strategy for cutting rates and is signalling its readiness. Each subsequent meeting is live now, but the CNB obviously does not want to commit too much to the next steps. All options remain open and will depend on incoming data. We believe that the new economic forecasts will be a sufficient reason for a rate cut in November.
EUR rates: Bear steepening (Nordea) - Risk off! EUR curves have bear steepened with cues taken from the USD curves, continuous ECB speak about faster QT and issuance.
China
Why Are China’s Households in the Doldrums? (Liberty Street Economics, NY Fed) - A perennial challenge with China’s growth model has been overly high investment spending relative to GDP and unusually low consumer spending, something which China has long struggled to rebalance. As China attempts to move away from credit-intensive, investment-focused growth, the economy’s growth will have to rely on higher consumer spending. However, a prolonged household borrowing binge, COVID scarring and a deep slump in the property market in China have damaged household balance sheets and eroded consumer sentiment. In this post, we examine the impact of recent shocks on Chinese household behavior for clues around the outlook for reviving consumption and economic growth in China.
Canada
BMO Business Activity Index — A Brief Respite (BMO) - The Canadian economy appears to have bounced back after a mild contraction in the second quarter, according to BMO's Canadian Business Activity Index (BAI). The BAI rose 0.4% in August, after jumping 0.5% in July. That highlights that some momentum has built up through the third quarter after wildfires and public sector strikes weighed on the past quarter.
Mexico
Mexico | The window for the rate cut cycle to start in 4Q23 seems to have closed (BBVA) - Banxico will likely remain backward-looking in the short term and keep its policy rate steady for at least this month’s meeting and the following two in 4Q23.
Real Estate
Lot Values Trail Behind Inflation (NAHB) - Lot values for single-family detached spec homes continued to rise in 2022, with the national value and six out of nine Census divisions setting new nominal records, according to NAHB’s analysis of the Census Bureau’s Survey of Construction (SOC) data. The U.S. median lot value for single family detached for-sale homes started in 2022 stands at $56,000, with half of the lots valued higher and half of the lots valued below the median.
Mortgage Applications Decrease in Latest MBA Weekly Survey: Week of September 22 (Mortgage Bankers Association) - Mortgage applications decreased 1.3 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending September 22, 2023. The Market Composite Index, a measure of mortgage loan application volume, decreased 1.3 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 2 percent compared with the previous week.
FX
Macro/FX Watch: Crude oil gains expose EUR and JPY further (Saxo Bank) - Markets are in a risk-off with the rip higher in crude oil prices highlighting stagflation concerns. EUR remains exposed not just to higher energy prices but also the widening BTP-Bund spreads that would be another headache for the ECB. Focus turns to inflation prints out from Eurozone economies over the next two days. Meanwhile, intervention risks in Japan could bring in opportunities while AUD remains under pressure due to the souring risk sentiment.
Employment
Countries That Close Gender Gaps See Substantial Growth Returns (IMF) - Narrowing the gap between the share of men and women who work is one of the very important reforms policymakers can make to revive economies amid the weakest medium-term growth outlook in more than three decades.
Outlook
International Economic Outlook: September 2023 (Wells Fargo) - As global growth peaks, we have revised our global GDP growth forecast slightly lower since early September, and now see growth of 2.6% in 2023 and 2.2% in 2024. Softer growth prospects for the Eurozone, Japan and India contributed to the downgrade, while we also have a somewhat weaker outlook for the Canadian and Swedish economies than previously.
Global Monthly - The inflation comeback? (ABN AMRO) - Rising oil prices and a bottoming out in good prices are expected to drive a rebound in inflation in the US over the coming months, and to slow the path back to 2% in the eurozone.
Research
Gambling to preserve price (and fiscal) stability (ECB) - We study a model in which policy aims at aggregate price stability. A fiscal imbalance materializes that, if uncorrected, must cause inflation, but the imbalance may get corrected in the future with some probability. By maintaining price stability in the near term, monetary policy can buy time for a correction to take place. The policy gamble may succeed, preserving price and fiscal stability, or fail, leading to a delayed,
possibly large jump in the price level.
Central bank communication by ???: The economics of public policy leaks (ECB) - Leaks of confidential information emanating from public institutions have been the focus of a longstanding line of research. Yet, their determinants as well as their potential impact on public viewsand on policy effectiveness remain elusive. To address this gap, we study leaks from central banks because their effects are instantaneously reflected in financial markets.
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