Producer Prices Could Signal Turnaround in Europe
The eurozone producer-price index normally flies beneath investors’ radar. It may be time to pay attention
With inflation, or its absence, in the market’s sights, every number counts.
As economic indicators go, eurozone producer-price data tends to get elbowed aside by its bigger sibling, the harmonized index of consumer prices. This is understandable. Producer prices can be volatile and don’t drive monetary policy. But with the European Central Bank buying government bonds, the euro having slumped and signs of eurozone growth starting to bubble up, producer prices due Tuesday are worth watching.
The last reading for January showed a steep decline: The index fell 0.9% from the previous month and 3.4% from a year ago. Annual eurozone producer-price inflation has been negative since August 2013; in January, prices fell from the year-ago month everywhere except in Luxembourg.
ENLARGE
As with consumer prices, a lot of this is due to energy costs. Excluding those, producer prices were down 0.7% in January from a year earlier. But it is still a signal that companies lack pricing power. That raises the risk of entrenching more subdued expectations, potentially denting expansion and investment plans. This, in turn, threatens the sustainability of the nascent eurozone recovery. While there are many tailwinds at the moment, growth still isn’t broad-based.
Producer prices, though, might start to show some hopeful signs. Annual consumer inflation moved off its lows in February and March, even if the latest flash reading showed it still slightly negative. And survey data have suggested manufacturers are joining in the eurozone recovery.
Markit’s manufacturing purchasing managers index rose to a 10-month high of 52.2 in March, with incoming business picking up. Companies said they were hiring at the fastest pace in more than 3½ years. Significantly, the survey showed a big rise in input prices, the first in seven months, and broadly stable selling prices. There is evidence the weaker euro is having an effect on import prices. They rose 0.8% in February from a month earlier in both Germany and France.
Meanwhile, the credit straitjacket is loosening for companies. Most important, borrowers seem willing to take on debt. Manufacturers might get their mojo back.
A recovery in eurozone producer prices would be another reason to believe growth is becoming more robust. It also would be another sign last year’s deflation scare was just that—a scare.