German Inflation Continues To Surge Making Things Even More Complicated For The ECB

With headline inflation on the rise, the ECB's attempt to avoid the taper conversation will become more and more complicated.  However, we think German headline inflation could eventually range between 3% and 4% in the second half of this year.

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Headline inflation is accelerating like the temperature outside

Based on inflation outcomes of several regional states, German inflation in May came in at 2.5% year-on-year, from 2.0% in April. The harmonized index relevant for European Central Bank policymaking increased to 2.4%, from 2.1% in April - the highest level since November 2018.

This acceleration in German inflation is mainly due to higher energy prices but don’t forget that all the lockdowns still distort these numbers and imputed prices as many goods and services are simply unavailable.

All inflation drivers in full swing

Today’s May inflation data shows that the entire range of potential inflation drivers is currently in full swing.

Higher producer prices on the back of supply chain disruptions, higher commodity prices, and the gradual reopening of the economy are all leaving their marks on consumer prices. According to data from regional states, prices for household goods, services, and leisure activities were the main drivers of headline inflation.

We think German headline inflation could eventually range between 3% and 4% in the second half of this year

The fact that headline inflation has now surged from -0.7% YoY in December last year to 2.4% in May will cause concern for many Germans, and the bad news is - there is more to come. With supply chain disruptions, like higher container prices, delivery problems with semiconductors, and elevated commodity prices, producer prices are set to increase further, possibly putting more pressure on consumer prices.

Add to this some post-lockdown reflation in a few sectors, which will gain momentum soon, and the reversal of the German VAT rate and German (and eurozone) inflation, the only way is up. In our view, German headline inflation could eventually range between 3% and 4% in the second half of this year.

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