Wednesday, December 16, 2009

Annual Inflation Returns In U.S. & Euro Area

Both the U.S. and the Euro area reported inflation numbers for November, and as expected, both saw a return in annual price inflation.

In the U.S. the annual rate of price inflation rose from -0.2% to 1.8%. This was mainly a base effect, as the dramatic price drop in November 2008 was removed from the comparison, but prices rose 0.4% compared to the previous month. As in previous months, the increase would have been much higher if rents and "owner's equivalent rent" hadn't dropped.

Because of base effects, the annual rate of inflation will increase further in December, but it will likely stabilize or even drop in January because of the recent "mini-rally" in the dollar and the drop in the price of oil this has caused.

The increase in the Euro area was much smaller, from -0.1% to 0.5%, thanks to the elevated exchange rate of the euro versus the dollar in November and a much smaller base effect.

The inflation rate will increase further in December, and because of the recent drop in the euro, the likelihood of further increases in January is higher than in the U.S.

The so-called "core rate" actually fell back in November, from 1.2% to 1%, but that number has always been a lagging indicator.

3 Euro area countries, Ireland (-2.8%), Portugal (-0.8%) and Malta (-0.1%) still had annual price deflation, as did 2 countries with fixed exchange rates to the euro, Estonia (-2.1%) and Latvia (-1.4%). In particularly Latvia but also Estonia (And Lithuania which had 1.3% inflation) the rate of inflation will likely continue to decline (or more accurately, the rate of deflation will increase) as part of their adjustment from the excesses of the bubble years.