German CPI Tomorrow: Why The Euro Might Need Inflation

Tomorrow’s big event for euro traders is likely to be the release of German Consumer Price Index data for March.

While the data itself is important enough to move the markets, there are some underlying trends that could affect European markets. Specifically, there is a chance for European assets to disconnect from the world trend, opening a few trade opportunities.

What we are looking for

Let’s start with the expectations for tomorrow. Of all the different inflation data coming out, the one we want to focus on is the Harmonized Index of Consumer Prices (HICP).

This is basically Germany’s inflation, adjusted to track with the rest of Europe. Projections are for it to slip to an annualized rate of 1.6% compared to 2.0% in the prior measurement.

However, expectations are for the underlying monthly CPI to rise to 0.7% in comparison to 0.5% prior. Inflation in Germany was negative through the latter half of last year. It only jumped back to above pre-covid levels in January and February.

That said, even in the worst of the first covid wave, inflation was still relatively high. It was only when Germany reopened in the summer that inflation turned to deflation.

What’s going on?

Around the world, there is concern about potential inflation.

Governments have put massive amounts of cash into the economy. Meanwhile, central banks have dramatically expanded the monetary base, and economic activity is anticipated to grow as the economy reopens.

If we consider those three elements for Europe, and Germany in particular, they are in a unique situation different from the rest of the world.

For starters, the EU has spent the least in covid relief as a percentage of GDP of all the major economies. This is understandable, because it’s not, in itself officially, a country.

But the constituent countries were already above debt targets. They had limited capacity to spend. More importantly, the spending isn’t directed primarily at consumers, but into infrastructure.

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