The ECB now faces a severe burst of stagflation as PPI in Italy rises to 32.9%

by Shaun Richards

Today we can switch to the other side of yesterday’s coin. All those Eurobonds have to be bought by someone and the biggest buyer of Euro area bonds is of course the European Central Bank or ECB. It held just over 4.7 trillion Euros of such bonds at the end of last year. So that is one perspective for the ECB meeting currently taking place which is that there will be even more bonds to buy. Exactly how many will be decided at least to some extent at the ministers meeting also taking place. Not really an escape from the QE buying though is it? The numbers below are presented as a reduction but of course the previous amount was 20 billion a month so in fact it was a rise. A bit like a reverse of the chocolate ration in Orwell’s Animal Farm.

monthly net purchases under the APP will amount to €40 billion in the second quarter of 2022 and €30 billion in the third quarter. From October onwards, the Governing Council will maintain net asset purchases under the APP at a monthly pace of €20 billion for as long as necessary to reinforce the accommodative impact of its policy rates.

Inflation Problems

This morning the statistics office of Italy turned up the heat in this area.

In January 2022, compared with January 2021, industrial producer prices rose by 32.9% (+41.8% on
domestic market, +10.5% on foreign market).

For the standard official response of base effects there was this.

In January 2022, compared with the previous month, industrial producer prices increased by 9.7%. On
domestic market, producer prices rose by 12.4%, on non-domestic market they increased by 1.6%.

So the monthly increase was what would have been before this phase considered to be an unacceptable annual one. If we look into the breakdown we see that energy prices rose by 28% on the month and that of course is before the effects of the Ukraine war. If we look at the three-monthly pattern we see that January saw quite a new push overall.

Over the last three months, compared to the previous three months, industrial producer prices increased
by 10.6% (+13.7% for the domestic market, +2.6% for the non-domestic market).

That is especially awkward for the ECB as it under President Lagarde had been assuring people that inflation will fade in 2022 when in fact we are seeing quite a blast.

Also we can note quite a push higher for prices in the construction sector as presumably materials and energy costs were being passed on.

In January 2022 construction producer prices of Residential buildings and non-residential buildings
increased by 2.5% on monthly basis and by 6.4% on annual basis. Construction producer prices of Roads
and railways increased by 2.1% compared to the previous month and by 5.4% on annual basis.

We can now switch to Greece and its statistics office from this morning.

The HICP in February 2022 compared with February 2021 increased by 6.3%….The HICP in February 2022 compared with January 2022 increased by 0.9%.

So a monthly rise of 0.9% brings us to an annual rate for consumer inflation of more than treble the ECB’s target.

We can look at a breakdown and look at food costs.

7.1% in the group Food and non-alcoholic beverages due to the increase, mainly, in the prices of: bread and cereals, beef, lamb and goat, poultry, other meat preparations, fresh fish, milk cheese and eggs, oils and fats, fresh fruit, vegetables, ice creams,
food n.e.c., coffee, mineral water-refreshments-fruit juices. This increase was partly offset by the decrease, mainly, in the prices of: pork, dried salted or smoked meat.

That is from Greece’s own different measure but the change is very similar. Also I think you can all figure out the driving force in the changes below.

25.4% in the group Housing, due to the increase, mainly, in the prices of: rentals for dwellings, electricity, natural gas, heating oil.

Transport too although here the national measure is quite a bit higher than the Euro area one.

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12.2% in the group Transport, due to the increase, mainly, in the prices of: new motorcars, second hand motorcars, motor cycles, tyres, fuels and lubricants, tickets for passenger transport by air.

So even more inflation is hitting the Euro area

Deflation and even recession

I have noticed reports of businesses hitting trouble mostly due to higher energy prices but also due to commodity ones.

Friends of mine are sending me articles about layoffs and closures of steel mills or other factories.. the situation is dramatic The north of Italy is the most industrialized area in Europe.. just saying ( @AlessioUrban)

In reply there is a link to Brescia Today which tells us this.

As reported by Siderweb , the portal dedicated to “steel information”, in our province Ori Martin will probably stop production until Friday: a few days of closure have also been announced for Duferco Travi e Profilati. Only a few shifts for Alfa Acciai, which would be evaluating the situation in these hours. The same strategy could be adopted by the Feralpi group. No indication, for now, by the Arvedi group.

It is caused by this.

As for energy, the Pun (Single National Price of Electricity) as of March 7 has risen to over € 587 per MWh: it is almost four times higher than in the same period a year ago, about ten times in more than 2020.

Also there is this reported by Telefruili.

Automotive  Lighting  of Tolmezzo (Udine) announced the layoffs for 837 workers between workers and clerks, from March 14 to April 9, due to production slowdowns linked to the Russian-Ukrainian conflict. The news comes after the continuous ‘stop and go’  of Ferriere Nord and the alarm raised by Abs.

We can take this forwards to the official production series.

In January 2022 the seasonally adjusted industrial production index decreased by 3.4% compared with the previous month. The change of the average of the last three months with respect to the previous three months was -0.5%.

The calendar adjusted industrial production index decreased by 2.6% compared with January 2021 (calendar working days being 20 versus 19 days in January 2021).

As you can see it looks as though higher input costs were already having an impact. Frankly I think that the suggestion below looks an understatement as we now widen our view back to the Euro area.

Goldman Sachs downgrades Euro Area growth forecast to 2.5% from 3.9% for 2022 ( @flacqua )


This situation is one of the most extreme versions of being between a rock and a hard place we have seen. Inflationary trends are soaring ( what will Italian producer prices be in war affected February?) but the economy is receiving a downwards push at the same time. Energy intensive businesses will see more short-time working and closures. We have been right to expect power cuts due to the failures of energy policy although the nuance is that prices are doing the job as companies shut down. The impact of the latter will filter and spiral its way though the economy.

Then we can return to where we started and QE in the Euro area which looks endless.

‘Relax, ‘ said the night man,
‘We are programmed to receive.
You can check-out any time you like,
But you can never leave!’

For the first time in a while I am interested in the press conference as the journalists should roast President Lagarde but will they? Care is needed because the war is of course not her fault but she left the Euro area exposed by her willingness to accept rising inflation and her blithe assurances it would fall. Now that very same inflation will create the economic weakness her policy was supposed to avoid.


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