Macro roundup: Inflation road bump
Greek inflation rate increases for the first time in 10 months in July
Since the big global macro story of the past couple of years has been inflation, it makes sense for this newsletter to pick up from its return from vacation with what’s happening to prices.
The latest consumer price index print showed a bump in the road in Greece’s rapid disinflation path in July. Prices grew 2.5 percent from the same month a year earlier — a jump from 1.8 percent in June.
For all that the headline inflation rate has fallen dramatically in recent months, the growth in food prices has shown little sign of abating. Food inflation remains well into double digits, increasing to 12.3 percent in July from 12.2 percent the month before. However, food’s overall contribution to headline inflation only increased by 0.1 percentage points to 2.6 percentage points.
The bigger factor was energy prices. These were instrumental in the initial surge in headline inflation — above the rate for the euro area as a whole — and then played an equally critical role in bringing inflation rate down as time wore on.
The energy effect, while still strong, is beginning to weaken. In June, energy subtracted 3.8 percentage points from the headline inflation rate, whereas in July this impact fell to just 3.4 percentage points.
Core inflation — which strips out both energy and food — also isn’t coming down as fast as might be hoped. After the rate of core price increases fell from 6.7 percent to 4.9 percent between May and June, it rose again to 5.4 percent in July. That led to a contribution to core inflation that rose to 3.2 percent from 3 percent in June.
The spread between interest rates offered by banks on new loans and new deposits is an indicator that rarely earned much attention in the pre-pandemic world, where inflation was negligible and rates were low.
However, this spread broke out to record highs this year as banks responded to interest rate hikes from the European Central Bank by raising the rates on new loans, without similarly sized rises to rates on new deposits. As a result, we’ve paid quite a bit of attention to this indicator this year.
We’ve paid quite a lot of attention to this indicator this year, so it would be remiss not to note that the spread finally came down in June, to 5.51 percentage points from 5.76 percentage points in May.
This has more to do with a drop in lending rates — which had been soaring — than it does with deposit rates. The weighted average rate on new deposits increased to 0.31 percent from 0.28 percent — a 3 basis point increase, which was the same size increase as in May. On the lending side, the weighted average interest rate on new loans dropped 22 basis points to 5.82 percent.
While the rate on new deposits remains low, a couple of observations beneath the surface are worth drawing out.
The first point is that while interest rates on sight deposits by households — current (or checking) accounts — remained effectively glued to zero, the uptick in rates for term deposits is becoming more marked. The rate rose 20 basis points between June and April to reach 1.42 percent. Just in August 2022 that rate was at a record low of 0.11 percent.
The second observation is an anecdotal one, but when I checked the term deposit rates offered online by my bank today, they were in line with the figures on the Bank of Greece press release for the first time since I started keeping tabs on this earlier this year. While the rates available online were clearly higher than before, up until now they still lagged the rates in the official statisitics.
The explanation I was reading was that higher rates were available in branch. Nevertheless, it still feels like a shift that the latest rates I can see from my bank online — without having to set foot in a branch — are now in line with the published statistics.
Greece’s seasonally-adjusted unemployment rate declined to 11.1 percent in June from a revised 11.3 percent the month before.
Retail sales increased 7.2 percent from the same month a year earlier in May, compared with a rise of 1.7 percent in April.
Volume fell 0.4 percent in May from a year earlier, compared with a drop of 5 percent in April
Industrial production decreased 3.6 percent from a year earlier in June, compared with an increase of 1.9 percent in May.
Manufacturing production decreased 0.6 percent in June; electricity supply fell 14.8 percent
The central government posted a primary budget surplus of 3.56 billion euros in the first seven months of the year — higher than the target of 1.83 billion euros.
The government posted a primary deficit of 1.16 billion euros in the same period of 2022
The manufacturing purchasing managers’ index in July was 53.5, up from 51.8 the month before, indicating the biggest expansion since May 2022.
A reading above 50 indicates improving operating conditions in the manufacturing sector, according to S&P Global, which produces the index
Expansion driven by stronger upturn in output and new orders
However, firms were less upbeat on concerns about potential interest rate hikes, inflation and the sustainability of strong demand
Next week’s key releases
Monday, Aug. 21:
June balance of payments (Bank of Greece)
Friday, Aug. 25:
Jan-July final central government budget execution (Finance Ministry)