Producer Price Inflation surges in Spain

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by Shaun Richards

Some days the economic news just rolls neatly into the current economic debate and this morning is an example of that. If we look at Spain we are told this.

The annual rate of the general Industrial Price Index (IPRI) in the month of May is 15.3%, more than two points above that registered in April and the highest since January
1983.

So their version of producer prices is on a bit of a charge and this is repeated in the monthly figures.

In May, the monthly variation rate of the general IPRI is 1.6%.

If we look into the detail we see that this was a major factor.

Energy, whose variation of 2.6% is due to the rise in Oil refining, Production
Of gas; pipeline distribution of gaseous fuels and Production, transportation and
electrical power distribution. The impact of this sector on the general index is 0.824.

So half of the May move is a rise in energy prices and we know that this theme has continued this month as we note that Brent Crude futures are just below US $76 per barrel.

The other factors were.

Intermediate goods, which presents a monthly rate of 2.1% and an effect of 0.601….Non-durable consumer goods, with a rate of 0.6% and an effect of 0.149, caused by the increase in the prices of the Manufacture of vegetable oils and fats and animals.

So we see that energy and intermediate prices are on a bit of a charge but that so far this has not really fed into consumer goods. In terms of a pattern we see that something seems to have changed in November ( up 0.9%) last year and since then we have seen quite an increase overall.

As we will be moving on to consider the implications for the ECB let us note the number it will ask for.

The annual variation rate of the general index without Energy increases more than one and a half points, up to 7.1%, standing more than eight points below that of the general IPRI. This rate is the most since July 1995.

So they lower the number but cannot avoid the general principle of an inflationary push.

Euro area money supply

If we now switch to the money supply we have the ECB trying to pump it up to generate inflation and here are it latest efforts.

Annual growth rate of broad monetary aggregate M3 decreased to 8.4% in May 2021 from 9.2% in April……Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 11.6% in May from 12.3% in April.

This leads to several impressions. Firstly these are high rates of annual growth and next they are slowing. But care if needed with the latter view because the monthly rise in broad money was higher as 65 billion Euros in March and 43 billion in April has been followed by 76 billion in May. It was not narrow money which was virtually the same in May as it was in March after a small dip in April.

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The banks are still seeing cash pour in which of course has been a feature of these pandemic times although again the annual numbers show some slowing.

From the perspective of the holding sectors of deposits in M3, the annual growth rate of deposits placed by households decreased to 7.9% in May from 8.3% in April, while the annual growth rate of deposits placed by non-financial corporations decreased to 8.9% in May from 12.8% in April. Finally, the annual growth rate of deposits placed by non-monetary financial corporations (excluding insurance corporations and pension funds) increased to 11.4% in May from 8.7% in April.

The actual numbers for deposit increases coincide with this more than the previous ones as we note the increase in overnight deposits has gone 69 billion Euros in March then 45 billion in April, followed by 59 billion in May.

Credit

These numbers are hard to interpret right now. This is because they are a lagging indicator of economic activity but got a sharp shove higher in the spring of last year via central bank and government action. However there is one area we can look at from several angles.

The annual growth rate of credit to general government decreased to 15.4% in May from 18.0% in April,

There clearly has been a lot going on here and you will not be surprised to read that there was a clear shift last March. The annual growth rate had been negative for a while signalling a type of austerity but then went positive rising to a peak growth rate of 24% in February. The monthly rate has been falling overall ( 67 billion then 27 then 37 in May) but it is now some 6.1 trillion Euros.

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@fwred has been crunching some numbers for the French public debt.

French public debt rose to a new high in Q1, at 118% of GDP

But someone has been buying.

the Eurosystem ( @banquedefrance  & @ecb ) holds more than 20% of general government debt, returning interest payments to the state eventually. Excluding Eurosystem holdings, French public debt has risen slightly since 2015 and stands at 94% of GDP.

So QE excluded there has not been much change and of course as we observe so often an SPV fixes everything!

 On the upside, the first payout from the European Recovery and Resilience Facility (RRF) should help to ease the deficit. ( Bank of France)

Well until Eurostat makes them include it anyway.

The European Commission has today adopted a positive assessment of France’s recovery and resilience plan. This is an important step towards the EU disbursing €39.4 billion in grants under the Recovery and Resilience Facility (RRF). ( European Commission)

Comment

As we have seen today the current central banking challenge is the fact that we are seeing inflation warning signals whilst they are still pumping up the money supply. This provides quite a challenge and reverses past central banking rules. There are various features of this as the ECB like so many central banks funneled cash to the banking sector just before the furlough schemes did exactly the same thing. I note that Isabel Schnabel estimated yesterday that there were 400 billion of excess savings at the end of 2020 so there will be more now. Eventually these will be spent giving the economy another shove at a time of supply issues such as the lack of semiconductors for the motor industry.

There are growing problems with the claims that inflation is low if we return to Spain.

The  Government is  going to approve this Thursday in an   extraordinary Council of Ministers a  lowering of the VAT on electricity from 21 to 10% , as confirmed by sources from  United Podemos  to RTVE in the first instance and sources from Moncloa later.

Also there is the area which escapes the official inflation numbers.

ECB’S SCHNABEL: THE FACT THAT HICP MEASURES DO NOT ADEQUATELY ACCOUNT FOR OWNER-OCCUPIED HOUSING IS A KEY FLAW. ( @FinancialJuice)

Actually they do not account for it at all but let us give her some credit for at least mentioning the issue.

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