Another harbinger of slowing down inflation. Readings better than expected

thaipriusclubDecember 2, 2022

6 2 minutes read

Another harbinger of slowing down inflation. Readings better than expected

PPI inflation (producer price index) in the euro area in October 2022 slowed down by 30.8%. year to year with 41.9 percent recorded in September and 43.3 percent in August, Eurostat reported on Friday. This reading is better than expected, because the average forecast assumed a slowdown to 31.5 percent.

PPI stands for producer inflation. It shows what prices producers get from the sale of their products and shows what can happen with consumer inflation a few months in advance. This indicator shows whether inflationary pressure appeared at the production stage and whether companies manage to pass the rising costs on to end recipients, i.e. customers. If the PPI index increases, one should expect an increase in prices in retail, and thus also the most closely observed consumer inflation index, CPI (this reading is affected – apart from products – also by the prices of services, PPI inflation does not measure price changes in services).

The market hopes that the peak of producer inflation in the euro zone is behind us.

On a month-on-month basis, the PPI in the euro zone fell by 2.9% in October, which is positive news considering that in October the m/m increase was 1.6%. Also this reading is better than expected, as prices were expected to drop by 2.1% m/m.

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This is another signal heralding the decreasing price pressure in Europe. Preliminaries were released this week consumer inflation indices in the euro area for November, where the harmonized index of consumer prices (HICP) slowed down to 10%. y/y 10.6 percent in October. This reading positively surprised economists who expected a slowdown to only 10.4 percent. There was a marked decrease in the indicators in Germany and Spain.

However, it is too early to celebrate the success, because to a large extent the slowdown in consumer inflation rates in November is the result of the fall in energy and fuel prices, which are susceptible to events on international markets and administrative decisions. Core inflation, which does not take into account energy, fuel and food prices, was the same in November in the euro area as in the previous month and amounted to 5%. y/y This indicator illustrates the strength of domestic demand and the scale of inflation spilling over the economy (the source is high prices of energy, fuels and raw materials, which increase the costs of producers).

Positive data on inflation also came from the US. On Thursday, it turned out that the PCE inflation index (personal consumer expenditures), i.e. the measure of consumer inflation preferred by the US central bank, slowed down to 6% in October. y/y 6.3 percent in September. Even more importantly, also in line with the consensus, core PCE inflation (i.e. index without energy, fuels and food) fell to 5%. y/y 5.2 percent in September.

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