German Inflation Cools Off But Likely To Resurge Soon

Admittedly, the surge in German inflation (and eurozone inflation) can still be attributed to one-off factors. However, 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. In fact, today’s European Commission sentiment indicators showed that selling price expectations in the eurozone manufacturing sector were at an all-time high and close to an all-time high in the services sector. Strong evidence of a lingering pass-through from higher producer prices to consumer prices.

Summer challenge for the ECB: find the right way forward

At the last policy meeting and even since then, the ECB has stuck to its very benign view on inflation.

An inflation outlook of 1.4% in 2023 is anything but scary, however, this benign take could soon be subject to some rethinking. In fact, in our view, the breeding ground for at least one edition of second-round-effects has hardly ever been more fertile than currently on the back of reopenings of the economy. A pass-through from producer to consumer prices as well as a pass-through from consumer prices to wages.

In our view, the breeding ground for at least one edition of second-round-effects has hardly ever been more fertile than currently on the back of reopenings of the economy

The problem for the ECB is that an event like a pandemic is so unprecedented that models based on historical pass-throughs could easily and quickly become invalid. Sure, in the longer run, a negative output gap, slack in the labor market and longer-term damage from the pandemic argue against runaway inflation but won’t stop the debate about whether the eurozone economy still needs the current level of monetary stimulus going into the second half of the year. In our view, it will become increasingly difficult for the ECB to stick to its benign take on inflation. Reintroducing a risk assessment for the inflation outlook could, in our view, improve the ECB’s credibility.

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