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German and Spanish CPI Point to Easing European Costs

C. Scott GarlissStansberry NewsWire

European inflation growth is cooling...

The eurozone, like the U.S., is starting to see cost growth ease. The change is paramount to the outlook for European Central Bank monetary policy. After all, it has raised its benchmark deposit facility rate by 2.5% since July. The change brought interest rates back up to 2% and ended an eight-year experiment with negative yields.

In November, eurozone inflation growth was 10% on a year-over-year basis. Since the monetary union’s formation, that’s just below the all-time high of 10.7% set in October. And if policymakers don’t see a more rapid decline in prices toward their 2% target, they may get even more aggressive with their rate-hike plans.

However, recent data point toward an additional downside in cost growth...

This morning, Germany’s Federal Statistics Office released its preliminary Consumer Price Index (“CPI”) figures for December. On a year-over-year basis, the number rose 8.6% compared to the expectation for a 9% increase and November’s 10% gain...

This marked the lowest reading since the 7.9% jump reported in August and the second straight contraction on a month-over-month basis. The rate of increase in goods prices slowed to 13.9% compared to the 17% plus growth experienced in the prior three months.

The Statistics Office said that government assistance on energy bills helped to drive cost savings in December. The rate of increase in energy prices was 24.4% for the month compared to the recent 43.9% peak surge in September. At the same time, food costs were up 20.7% versus a 21.1% gain in November.

That number is important for the regional outlook. You see, Germany makes up about 30% of eurozone economic output. As Germany’s economy fares, so does the rest of Europe. Take a look at the following chart of German CPI compared to the broader eurozone...

As we can see in the chart above, cost growth for the region and its biggest economy tend to track each other closely. The European Union’s Statistical Office (Eurostat) is scheduled to release its CPI figures on Friday. Based on this morning’s numbers, it’s likely that regional cost growth could be weaker than the 9.5% estimate.

But it’s not just Germany that’s seeing inflation ease...

Late last week, Spain’s Statistical Office released preliminary December CPI. The number rose 5.8% compared to the 6.1% expectation and November’s 6.8% increase. This was the lowest rate of price growth since the 5.5% expansion in November 2021...

According to the Spanish government, the largest driver of the slowdown was energy costs. It said electricity prices rose less than they did a year ago while those for fuel contracted. At the same time, footwear and clothing prices fell but not as quickly as they did a year ago.

Spain is the region’s fourth-largest economy at roughly 10% of eurozone economic output. So, let’s observe eurozone CPI compared to that of Spain...

Like the chart of Germany above, Spain’s cost data tends to track close to the regional numbers but are not quite as tight. However, they do appear to be a leading indicator and point to more downside ahead.

While inflation is still high, this development is encouraging for ECB policymakers. If this trend continues, it could begin to take pressure off of policymakers to aggressively raise interest rates. Because as prices stabilize, households will feel less worried about how far their future earnings will go. That change will mean they will save less and start spending more. That will boost regional economic output.

And, as individuals’ confidence begins to grow, that extra money will find its way back to investing, improving the outlook for European stocks.