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Inflation in the Eurozone spiked to a new record in June, according to preliminary data released today by Eurostat. The overall rate of CPI accelerated to 8.6% in June, from 8.1% in May, and from 7.4% in April. All of them were records in the Eurozone data going back to 1997.
Inflation started spiking in August 2021, when it hit 3.0% for the Eurozone, well above the ECB’s target of 2%, but the ECB, aping the Fed, called it temporary. By December 2021, overall Eurozone inflation hit 5.0%, with two Baltic countries already in the double-digits.
It happened suddenly after years of radical money printing and negative interest rate policies, when overstimulated demand for goods was followed by supply chain issues to produce these goods, and this explosion in demand for goods happened globally, but particularly in the US, creating all kinds of supply chain chaos and price pressures, all of which triggered a broad set of behavioral changes among businesses and consumers where price increases were suddenly tolerated, and higher costs were successfully passed on, and became entrenched as the inflationary mindset had taken over.
And the ECB President Christine Lagarde brushed all of it off for way too long – though they’re now too finally taking it seriously.
Energy costs have been surging all last year, and in early 2022, additional spikes in energy commodities occurred as Russia invaded Ukraine, and as the European Union, the US, and other countries imposed sanctions on Russia. The war in Ukraine also tore up supply chains of agricultural commodities globally and of manufactures goods for European manufacturers.
But many commodity prices have now been falling for a while, and the price spike of crude oil has stalled for now, and the crazy spike in European natural gas prices that occurred in March has been partially unwound.
And yet inflation continues to surge as price increases have spread across the economy.
In September 2021, inflation in Germany hit 4.1%, the highest since the existence of the Eurozone data. In November 2021, inflation in Germany hit 6.0%.
Having seen this coming, and having warned about surging inflation for months, while being ignored by Lagarde, then-Bundesbank president Jens Weidmann, one of the few inflation hawks left on the ECB, asked German President Steinmeier to dismiss him from office effective December 31, 2021 for “personal reasons.” Everyone knew why he did: Disgust with the ECB’s monetary policies.
In his official statement at the time, Weidmann made a few gentle and vague references to his misgivings about the ECB’s dealings with inflation, such as when he said that it will be “crucial” to not look “one-sidedly at deflationary risks” but to also look at “prospective inflationary dangers.” And inflation spiked to 8.7% in Germany by May 2022.
In June, according to preliminary data based on the harmonized EU inflation measure released today, inflation in Germany dipped to 8.2%.
But this dip was largely due to the government’s actions to help take the bite out of this raging inflation, such as cutting fuel taxes and offering as of June 1 a €9-per-month pass as part of the Energy Cost Relief Packaged that allowed people unlimited travel on buses, trams, and rail systems across the country, which in travel season is a huge savings, on top of the commuting cost reductions. And so CPI dipped a little in June.
The nightmare for the ECB is not only the magnitude of inflation but also the range of the CPI rate by country, with 9 of the 19 Eurozone countries experiencing double-digit inflation rates from 10.3% in Luxembourg to 22% in Estonia. The country with the least terrible inflation rate was Malta, at 6.1%.
These are massive scary inflation rates in the 19 Eurozone countries:
In its response to this raging inflation, the ECB has now ended QE and signaled that it will finally raise interest rates in July, with possibly a bigger rate hike in September, and that the negative interest rates will turn into positive rates this year. Which would mark the end of the utterly absurd and destructive experiment of negative interest rates.
This is ridiculously too little, too late. A huge amount of damage has already been done by this raging inflation. But just the threat of ending QE and hiking rates has caused government bond yields to surge – and to diverge.
A year ago, the German 10-year yield was -0.2%, while the Italian 10-year yield was +0.8%, and the spread between them was about 1.0 percentage points.
By mid-June, the German 10-year yield hit +1.75%, and the Italian 10-year yield spiked to 4.17%, and the spread between them more than doubled to 2.4 percentage points. This was when “fragmentation” talk hit the front pages.
This resurging divergence in bond yields, as the bond market grapples with the first signs of being somewhat less manipulated by the ECB, is scaring the bejesus out of some folks at the ECB, in Italy (including “whatever it takes” former ECB head Draghi who’s now Prime Minister of Italy), in Greece, and in other fiscally challenged countries.
The resurging divergence in bond yields is scary stuff to the ECB that is now fearing “fragmentation” of the Eurozone. The ECB’s number one goal is not to keep inflation down, but to keep the Eurozone together.
So now it has come up with a new scheme where it will further and even more selectively interfere in the bond markets to prevent price discovery from taking place, whereby it will let German and other bonds roll off its balance sheet when they mature, but if yield spreads between Germany and countries like Italy widen beyond a red line, it will buy those countries’ bonds. In other words, it ends QE overall, but conducts QT for Germany and QE for Italy, or whatever.
Upon just these discussions and announcements – nothing actually has happened yet – the spread between Italian and German 10-year yields narrowed to 1.86 percentage points today. And inflation rages hotter than ever before in the Eurozone.
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I guess if you’re the ECB, you may have fragmentation fears. Others might have fragmentation hopes.
To be sure, the EU benefits the European elite. Whether it benefits the average citizen is not so clear. I think the Brits had it right.
Let’s be clear about this. Not the Brits. The English. Scotland, Wales and Northern Ireland all voted to remain and one day the English will regret this. Alba gu brath!
Time will tell, Scotland, Wales and NI all suck off the English tax payer and have falling populations, except Wales.
The single market is a good idea, the political construct an abomination and the Euro doomed.
Better to be in a life raft than dancing in the ballroom of the Titanic.
So typical. Then the English wonder why they are hated.
It’s kinda funny about Scotland.
They want to break away from England…Independence!!
The Shetland Islands (and all that oil) then wants to break away from Scotland…how dare you!
In fact, the EU is rapidly becoming an irrelevance. The demographics are a disaster. Percentage of world population falling and exports about to take a hit as German mercantilism stalls and along with it the engine of Europe.
Germany is sold out of wood stoves and firewood through spring 2023.
You will freeze hungry in the dark to support your unelected EU masters.
Everyone still has one eye on the rear-view mirror and a few little bouts of Euro fragmentation, a.k.a, the world wars.
Maybe Germany has some buyer’s remorse though, for, like the dog that finally chased and caught the car, it might not be sure what to do with European hegemony. Hegemony is expensive! Especially so, in a world of aspirations of bloated indebted consumerism.
So maybe Xi can aspire to woo away some EU nations’ affections, and take over some payments and headaches, and (as his ministers elsewhere learn to buy off the Taliban and such other odd bedfellows), he can figure out how to deal with the Camorra in the port of Naples.
1) In Germany, in the last 25 years, the average inflation was 1.5%. Madam ECB deposit rate of (-) 0.50 keep the zombie countries and banks alive. 2) After Madrid summit the German inflation might decline to 5%-6%. 3) If Germany wave a white flag, during winter 2022/ 23 inflation will stay in a trading range. If not, inflation might spike to 13%-16%. It is consider moderate, far below hyperinflation range, but far above the last 25 years range. 4) We don’t know what Germany do next. There is a risk that US best of the best friends might turn their back on us, crashing at the top.
Current policies will undoubtably bring about a rethink of the benefits of individual state membership in the EU. I’m sure some in Germany are pining away for the return of the Deutsche mark.
But can you imagine Italy with its lira?
During DM times I was often on Lago de Como (Italy) on the weekends. The price of a Cappuccino was 2000 Lira (2 DM). A couple of years later the price of the same Cappuccino in the same restaurant was 6 EUR (12 DM). Now the wealth of the median Italian is 3 times higher than the wealth of a median German. But 20 years ago Italy had a much stronger industry than now. I am German and I just can say : “I love the EU” . Great project, great leaders. Everything turned out as promised more than 20 years ago. The EU is really a performance oriented union. The big german industrial families need the EU. They want sell BMWs in Italy too. Just the german people get scr…d a bit. But this has tradition in this country.
“In its response to this raging inflation, the ECB has now ended QE and signaled that it will finally raise interest rates in July…”
Figuring out economics is hard! And having a herd of PhDs running things doesn’t seem to work.
Germany should leave the Eurozone. Do doubt the Dutch and Austrians would too, leaving France to lead the parade of wounded and injured.
Currently the IMF, UN and FED policies continue to ravages, dissimates, starves countless beings, cultures and lands. Don’t worry inflation is just a minor inconvinience for the Civilized West but life and death to the others of over 2 billion this year alone.
Sobering and important point. If I remember correctly, Americans spend about 10% of their net income on food. In much of the Third World it’s closer to 50%.
Central Bankers are central planners. And when central planners decide they intentionally assist one group at the expense of another. It is easy to see who benefited and who was harmed, intentionally, by central bankers.
Banana-Republic Christine has stated that y’all need to get used to inflation. Can’t hike rates to really combat hot inflation or the PIGS collapse taking the rest of europe into a depression. Like Japan they will suffer the double whammy of inflation and a currency crisis. Banana-Republic Christine must be on the blower to Banana-Republic Jerome for him to cut rates so the euro can strengthen, mitigating some of the red hot inflation!
These central bankers better realize inflation is causing the recessions, not high rates Today rates crashed in US That wont halt inflation. I can hardly wait for QT
German natural gas prices are scheduled to rise by more than a third this month. Gas shortages pressure residential and industrial customers alike. Chip shortages already closed some European auto assembly lines. Automakers exited Russia where auto production has plummeted. COVID lockdowns reduced Chinese auto production. Production is rebounding. China is rapidly expanding chip production to supply their manufacturers.
It’s interesting about chip shortages. Semi Chip companies stocks are down big time because of impending weakened demand and chip glut. The walmart and target stocks are down bigly because of inventory glut.
No one is short the leading-edge chips. What’s in short supply are the old el-cheapo $4 chips from 20 years ago — the trailing edge stuff — that go into the door lock of your car and into the regulator of your washing machine.
No one invested in new fabs for these old chips because the chips are so cheap and low-profit margin, and when the goods boom took off, there weren’t enough of them to go around. There are several thousand chips in a car, and if one is in short supply, the car cannot be finished.
Some chip makers are now investing in new plants to build these old chips, and they’re already charging higher prices for them. Price is going to be the solution.
In terms of the chips that go into crypto mining rigs, the kind that Nvidia makes, they’re going to be in oversupply too, as crypto-mining collapses. But you cannot use those chips for the door locks of the latest vehicle. So you’re going to have a glut of processors for crypto mining rigs and a shortage of cheap chips for power rear-view mirrors.
I’m impressed by your ability to keep up on the behind the scene details of the economic headlines. You must do a ton of reading.
Thanks for sharing this information with those curious to know.
I just moved my shop out to a spot i between two intel fabs in Oregon. In the last two days I have met guys who run chip development companies here ( one power chips the other analog chips) who begged me to do machine work for them as all the other machine shops are booked out for months. But I am still struggling to get my new 5 axis mill running so I can help them.
When you can’t really pay your bills as a country you have to have dishonest money like Zirp in a high inflation world. Doesn’t take too many years and most everyone is poor. As Jim Rogers says peasants always knew they had to have a little silver or gold stashed in the house for hard times.
Silver and gold. In this modern age they are relics of the past. At least the market thinks so. The market also thinks the USD is the brightest star of all – the King of Fiat!
Hence the Forex — a market to trade one fiat currency for another. Odd, if you think about it viz. precious metals, the traditional store of value.
I’ll continue to swap my USD for silver…
They are giving silver away. Eventually we may look back in wonder at $20 an ounce. Just as I look back on how much penny candy I could buy as a kid for five cents.
Only in Germany: – 9€ free for all on public transportation. Invited a large group of anarchy loving punks (and I mean jeans-jacket wearing, bear-all-day,piss-stained,dog caring people) to take the train to the north island of Sylt. Disruping summer holidays for the mostly elderly posh people, they are spray-puking due to these unforseen side-effects of free money. – restaurants in grandioso places like elb-riverside closing down on saturday night due to a lack of staff – the minimum payment just increased to 12€/h leading to hair-loss in businesses like bakeries (input cost for butter & wheat is up 100%, the 400 people bakery monthly salaries went up 1 Mio €) – I see our engineers still trading crypto on their screen when I enter office without prior notice. ADA coin… – I have not seen such low working morale ever And I could go on…
As I see it the small businesses business is completely messed up, I talk to business heads a lot. Fellow Germans are not willing to do the hard-working on high quality any more.
Now German politics for few bullets: – fucked up energy politics – school system behind the curve – ICE ban in discussion (likely to happen)
I guess the new reality will teach fellow Germans and Europeans how our wealth was created in the past, but I am afraid we will order new cars from china by the time it sinks in.
I changed my EUR a good chunk of gold miners, trying to ride out the drop in EUR/USD until we’re cheep enough for US retirees to save the exchange rate.
I still love the country, just hurts to see left-leaning people and friends who have to clue about energy and industry voting for more political support instead of less.
Some folks may find the shining easy money path was literally a road to serfdom. Or soldierhood.
Everybody have a nice holiday weekend!
Yes. And to you. And on July 4, we should all remember that “taxation without representation” is wrong. And if inflation be a tax, and if the Fed promotes inflation on the people (even at 2%), that is indeed “taxation without representation”. And the People certainly have NO representation on the Fed.
After rising from 41.50 in Apr 2020, ISM dropped from 64.70 in Mar 2021, when the housing market was rising and oil was in the 60’s, to 53 in June 2022, down 50%, well above 50. Since Mar 2021 the trend is down : we are in recession, recession… JP will hike moderately, dump some RRP, sending SPX up, before election. If ISM fail to exceed Mar 2021 high, it might drop to the 44-45 area.
The really interesting numbers are the government debt per person compared to the median wealth per person :
Italy : 135 % vs 260% 92.000 USD France: 98 % vs 230 % 102.000 USD Germany : 60 % vs 74 % 35.000 USD Holland : 49 % vs 56 % 31.000 USD
That means the average Italian is 3 times as wealthy as the average German but the italian government is nearly always bankrupt. The government is poor but the people are rich. Isnt that nice. So in Germany exactly opposite : The government is rich but the people are poor. These relations are not new, already in place since some years. But now more wealth transfer is planned by the ECB to the south and no real fight against inflation in sight by Lagarde. The numbers you can see on twitter @finanzmarktwelt.
I’m german (50 years old) and whatever happened in the last 15 years wasn’t what politicans told when it came to voting back in the years when we still had the DMark. At that time I listened to some critics about the Euro who were interviewed at Tagesschau (public television. Good quality at that time) and I thought ‘No, this won’t happen. My party cares for us germans. They wouldn’t allow this’. I relistened to some of them and have to say they were right. What I didn’t understand at that time: it is a political project. Normally I would expect (when working with professionals) that those who were right would get the saying now. Instead all of this moneyprinting lead to an incredible amount of tax-paid institutions full of unemployable people who want to ‘teach’ everybody about ‘democracy’. Pretty scary.
Glas industry is about to leave Germany because of high energy costs. Their machinery breaks down if they cannot sustain a certain temperature all the time. There goes another real industry.
Germany imported an incredible amount of people with no skills in the last 20 years. On the other hand it is very likely that hardly any new housing will be built next year (materials, regulation, labour, money, credit).
Wage inflation (for skilled industrial workers) didn’t start but will rise soon (this year).
Taiwan Semi, ASML, Micron, Intel, AMD, Applied Materials, Lam, Broadcom, KLA… are all down because of chip shortages. F-150 and Silverado are filling safe parking lots, because of chip shortages.
Chip sector drops nearly 10% on week as Micron outlook points to declining demand. The semiconductor sector logged one of its worst weeks in an already lousy year following more evidence that the COVID-19 chip sector boom was drawing to a close.
Micron Technology Inc. MU, -2.95% stoked Wall Street fears that customers may have loaded up on chips during the COVID-19-triggered shortage, and were now holding significant inventories, after the memory-chip maker forecast quarterly sales that were more than $1.5 billion below expectations
The chip index( SOX) is already down 37.7% for 2022! M.Watch July 1, ’22
No one is short the leading-edge chips that these companies make and where these companies make the bulk of their revenues.
What’s in short supply are the old el-cheapo $4 chips from 20 years ago — the trailing edge stuff — that go into the door lock of your car and into the regulator of your washing machine.
No one invested in new fabs for these old chips because the chips are so cheap and low-profit margin, and when the goods boom took off, there weren’t enough of them to go around. There are several thousand chips in a car, and if one is in short supply, the car cannot be finished.
Some chip makers are now investing in new plants to build these old chips, and they’re already charging higher prices for them. Price is going to be the solution.
In terms of the chips that go into crypto mining rigs, the kind that Nvidia makes, they’re going to be in oversupply too, as crypto-mining collapses. But you cannot use those chips for the door locks of the latest vehicle. So you’re going to have a glut of processors for crypto mining rigs and a shortage of cheap chips for power rear-view mirrors.
Lagarde is a bluff Buffon unlike our Jaw boning specialist Mr. Powell!
Lagarde announced last week that ECB has all the TOOLS needed to tame inflation but wouldn’t them in advance! ( Her version of ‘Whatever it takes’ I guess!) During the recent ECB forum on inflation, she said that b/c of uncertainties, we have to proceed cautiously and slowly!
All confidence building maneuvers, right?
We were promised a copy of the Bundesbank. We got a copy of the Italian central bank. Whatever it takes I suppose.
That is hilarious. But ouch!
I hope the EU and ECB gets disolved, goes bankrupt and is gone for good. It is the USSR but European socialist style and I never believe Romano Prodi. He is such a liar and so is all the brussels European government elites.
The inflation has damaged the core of our system. In short, people are now questioning whether governments are competent, transparent, and moral. That little dust-up at the US capitol was probably a precursor to something much bigger.
It’s time to allocate wealth to those who work and earn it. We should not allocate wealth to speculators, debtors, corporate and individual welfare recipients, etc., using system stability and short-term GDP growth as an excuse to discard rational long-term decision-making that is fair and balanced.
International trade must be balanced (imports=exports) to preserve jobs and communities in every country. Government fiscal spending must be balanced as well. Money printing serves no legitimate purpose and must end.
Can anyone explain what’s going on with the breakeven inflation rate in the US?
The 10 year breakeven inflation rate is now 2.34% about the same as it was in March 2021 before inflation took off (inflation was 2.6% then, 8.6% now).
The 5 year breakeven inflation rate is now 2.6% down from a peak of 3.6% a couple of months ago and again very close to March 2021 levels.
Does this mean inflation expectations are dropping?
Or is it something to do with QT?
Some folks on Wolf Street had been speculating that QE had been suppressing breakeven inflation but the end of QE and start of QT seems to be lowering breakeven inflation not raising it.
And yes – I do know that the breakeven inflation rate is declining because real rates are going up faster than nominal rates before some wise Alec chimes in with that tautology.
My question is why are real rates rising faster than nominal ones?
Is it because Fed was a bigger player in TIPs markets than regular Treasury market so flipping from QE to QT has a bigger impact on TIPs than Treasuries?
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But cryptos and DeFi created a big mess as hidden leverage is blowing up, and the mess spread to stocks.
Some demand destruction due to high prices, particularly gasoline. Shortage of new vehicles not helpful for spending on durable goods.
Hit by the brick-and-mortar meltdown years ago, it attracted short sellers, which attracted meme stock traders, which blew up the short sellers, and then each other.
But it still predates the 5% & 6% holy-moly mortgage rates, whose impact on prices we’ll only see in a few months.
Higher rates eventually enforce a sort of discipline on the drunken party in government and even in the private sector. That would be a good thing.
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