Is inflation beginning to ease?

by Shaun Richards

The economic story of 2022 and indeed the latter part of 2021 has been the rise of inflation. It has come with some nuances as the major areas of energy and more latterly food inflation were ones long dismissed by central bankers as non-core. Presumably it was on that sort of road that ECB President Lagarde stated this.

Inflation came from nowhere

Also it was rather extraordinary from someone who pursued a policy of money supply expansion and negative interest-rates. After all if that is not expansionary then how can higher interest-rates help in reducing inflation?

But whilst we continue to see double-digit increases in consumer inflation we see more and more hints that in some areas the times they are a-changing.

The US

One early hint was this.

The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.4 percent in October on a seasonally adjusted basis, the same increase as in September, the U.S. Bureau of Labor Statistics reported today.

That was from the tenth of this month and meant that the monthly increases had gone 0%,0.1%,0.4% and 0.4%. This has pulled the annual rate lower.

Over the last 12 months, the all items index increased 7.7 percent before seasonal adjustment.

But more significantly shows hope for a more significant weakening of inflationary pressure. Even the last two month would hard us to an annual rate of 5% and adding the previous two suggests more like 4%. Putting it another way the increase in the last four months is less than in any of March,May or June this year.

Then last Tuesday we got this.

The Producer Price Index for final demand increased 0.2 percent in October, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Final demand prices rose 0.2 percent in September and were unchanged in August.

As you can see from the quote there is also a clear weakening of the monthly trend. If we add in the -0.4% of July we we see quite a shift from the 1% plus of the first three months of 2022. A cautionary note is that this depends a lot on the behaviour of energy prices.

A major factor in the October decrease in prices for unprocessed goods for intermediate demand was the index for natural gas, which dropped 37.8 percent.

Also the US Federal Reserve on its way to reducing interest-rates via higher interest-rates has in fact raised it in one particular area.

Over half of the October rise in the index for services for intermediate demand can be
attributed to a 6.0-percent increase in prices for business loans (partial).

Oh well as Fleetwood Mac would say.


This does not start especially well.

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WIESBADEN – Producer prices for industrial products were 34.5% higher in October 2022 than in October 2021. ( Destatis)

But then we note this.

Compared with September 2022, producer prices fell by 4.2% in October 2022. This was the first month-on-month price decrease since May 2020 (-0.4% compared to April 2020).

Thus the annual rate is a lot better than the 45.8% of the previous report. Switching back to the monthly series we do not have the same sequence of improvement seen in the US as for example August saw an extraordinary surge of 7.9%. But we do have some hope at least and as we are in Europe so much of it is around this.

Compared to September, energy prices fell by an average of 10.4%, mainly due to the fall in prices for electricity and natural gas in distribution.

The trend in this area depends a lot on the weather and here we have an irony. For as long as I have been writing here the weather has been a scapegoat taking the blame for others failures. This time around both is and will be a major player although there is still the issue of past failures in energy policy such as relying in unreliable sources of power.

The revealingly named Blackout News takes up the story.

There are around 28,000 larger wind turbines in Germany. But whether these can also be operated economically is a well-kept secret of the operators. With appropriate simulation models, however, the utilization of most turbine types can be calculated relatively accurately. The NZZ carried out such simulations for 18,000 wind turbines at various German locations. The corresponding weather data from the last 10 years were used to determine the balance.

The result is sobering, because a good quarter of all systems have a utilization rate of less than 20 percent. This means that a system cannot be operated economically using the electricity price alone. Most wind turbines are only worthwhile for their operators because of the state subsidies. Only 15 percent of all systems have a utilization of more than 30 percent.

So we have a cautionary factor which returns us to the weather and  we add to the issue of how cold it will be how much will the wind blow? So far the autumn/winter period has mostly been mild with windy periods.

So any continuation of the favourable weather trend will see further falls in this area which will feed into other areas as energy costs have driven inflation elsewhere. Maybe we saw the beginnings of a response here.

Compared to September 2022, however, metal prices fell by 0.4%.

Crude Oil

From earlier today.

LONDON (Reuters) -Oil prices dropped to trade near two-month lows on Monday, having earlier slid by around $1 a barrel, as supply fears receded while concerns over fuel demand from China and U.S. dollar strength weighed on prices.

Brent crude futures for January had slipped 65 cents, or 0.7%, to $86.97 a barrel by 1000 GMT.

U.S. West Texas Intermediate (WTI) crude futures for December were at $79.71 a barrel, down 37 cents or 0.5%, ahead of the contract’s expiry later on Monday. The more active January contract was down 50 cents or 0.6% to $79.61 a barrel.

That is quite different to the US $120 or so we saw in early June. Also the WTI version is now at pre Ukraine invasion levels. The US has been draining its Strategic Petroleum reserve which is a temporary game but it is also true that recession and slow down fears have fed into the oil price. As last week saw a ten Dollar fall we can expect lower producer price inflation should this persist.


As you can see from the above there has been better news on the inflation front recently topped off by the fall on the price of crude oil last week. Also for those of us not the United States the recent weakening of the US Dollar has helped as 141 Yen, a Euro above 1.02 and the UK Pound £ above US $1.18 all help reduce commodity costs, albeit the US Dollar is stronger this morning.

The elephant in the room to all of this is the subject of energy costs. I have already pointed out the issue of the weather and for Europe in particular the inflationary heat would be on as Glenn Frey would say should we see any sustained period of cold still days. Rather against what we might previously have expected there seems to be a particular danger for France.

France faces a greater risk of a power shortfall in January due to lack of nuclear power, said its grid operator ( Bloomberg)

In a nutshell what looked to be a strength ( nuclear power) has faded in a sequence of breakdowns and over running maintenance.

Jan-23 power in France trades now 130% above Germany. ( @LionHirth )

So for once it is all about the weather….


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