Macro roundup: Twin Divergences

A gap is emerging between Greece's national and EU-harmonized inflation indices

The divergence in inflation between Greece and the rest of the euro area is one that we’ve noted many times in this newsletter — and it has carried on into May.

While the inflation rate for the euro area as a whole increased to 2 percent from 1.6 percent in April, in Greece the harmonized index of consumer prices fell 1.2 percent. That’s even worse than the drop of 1.1 percent in March.

However, another gap has opened up which we’ve paid less attention to, which is between two different measures for consumer price inflation — the national and EU-harmonized indices. Switching perspective to the national measure, Greece registered a whopping great inflation rate of 0.1 percent in May.

Ok, so that’s still pretty modest. But it is the first positive reading in over a year.

Whenever I write about inflation, I always use the EU-harmonized index. This makes sense to me, since the European Central Bank is the institution with policy responsibility for inflation, and this is the measure the central bank uses. It allows for direct comparison with what’s happening elsewhere in the euro area.

But this does put me at odds with most of the media in Greece which, understandably, focusses on the national measure instead.1 Usually there isn’t much difference between the two readings, so this doesn’t much matter, but it does get a bit awkward to talk about a 1.2 percent drop in prices when elsewhere it’s reported as an increase.

The discrepancy between the two readings, at 1.4 percentage points, is currently equal to the widest it’s been in the series going back to 1996. The other time it was this big was in August 2016, when the harmonized rate was 0.4 percent and national rate was minus 0.9 percent.

Factors driving this divergence appear to be energy costs — which are pushing the national rate up — and tourism, which is pulling the EU-harmonized rate down.

In the case of the former, this is mostly due to base effects, with a year having now elapsed since the collapse of energy prices last year. It’s not completely apparent to me why this weighs more heavily on the national than the harmonized index, but housing (homes need to be heated) has a greater weight in national index. It also records a much larger increase in transport costs than in the harmonized one.

One of the methodological differences between the two indicators is that the national index measures the household consumption expenditure of domestic residents, both in Greece or abroad, while the harmonized index takes into account all household consumption expenditure that takes place in Greece, by residents and non-residents.

This is where tourism comes in. The EU-harmonized index gives a much greater weighting to hotels-cafes-restaurants than the national index, and it records a 4.6 percent drop in prices, compared with a 1.6 percent drop in the national index.

Looking at the gap that’s opened up between the two readings, one question I have is whether this is brief blip, that closes with the harmonized index quickly “catching up” with the national one, or whether it will resemble the separation we saw in 2015/16 (see chart above), needing a year or so for the underlying causes to work themselves out of the data.

I don’t know the answer to this, but if the base effects of energy prices have had less impact on EU-harmonized inflation in April and May, it’s unclear to me why this would change in the coming months.

As for tourism, we’ll have to see if there’s a rush of people booking last-minute holidays in Greece this summer. But potentially we might see a base effect from last year’s collapse put upward pressure on the harmonized index in the coming months.

Other data

  • Industrial production rose an annual 22.5 percent in April. Obviously, a large part of this is the base effect, since we’re comparing with the height of the first lockdown. But that’s not the whole story. The index has moved way past its pre-pandemic level and the sector now appears to be rebounding strongly.

  • The unemployment rate in March dropped to 16.3 percent from 16.6 percent in February.

  • Building activity, as measured by the number of permits issued, increased 42.9 percent in March from a year earlier.

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Next week’s key data

Tuesday, June 15:
  • January-May central government budget execution (Finance Ministry)

Thursday, June 17:
  • First-quarter unemployment (Elstat)

Friday, June 18:
  • April balance of payments (Bank of Greece)

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In theory, the national measure should be the one that’s more representative of the lived experience of Greeks. Though I would refer readers to a very good substack (which I already linked to a few weeks ago) on the social specificity of inflation indices.