German Consumer Prices: Unexpectedly strong inflation pressures

German Consumer Prices: Unexpectedly strong inflation pressures

A higher than expected reading on German consumer price inflation is another indication that underlying price pressures in Germany are rising. We have noted before that there is a clear upward trend in German core inflation gradual and from a low level which is what would be expected in the context of growth rates that are dramatically above potential growth. It has also triggered a change in our euro area CPI forecast for July to 2.7% from 2.6%, falling into line with median expectations. In other words, the downside impacts from the periphery owing to tax hikes falling out of the annual rate calculation look to be offset by stronger inflation in the core.

According to the preliminary estimate, German inflation unexpectedly increased in July to 2.4% yoy from 2.3% on the national basis, and to 2.6% yoy from 2.4% in harmonized terms. The latter was 0.2ppt higher than expected. Incidentally, the risks to the national headline rate is skewed to the upside, judging by the data from the six Laender (see table). We estimate that the 0.4% mom gain is equivalent to a 0.2% mom gain in seasonally adjusted terms a solid, but not massive increase.

There were several sources of upside price pressures. Most obviously, energy prices were stronger than expected, especially heating oil and household energy. The effect on the headline rate of inflation was amplified by a strong (upward) base effect. These are mostly delayed feed-through effects of past increases in energy commodity prices. A second source of upside pressure was apparel: although prices were cut compared with the previous month as the summer sales season got under way, these cuts were notably smaller than one year ago, and so annual rates jumped (in most Laender). A similar effect is also likely to have been behind the acceleration in household goods' prices. It is too early to make a judgement if this is just a timing effect and therefore a one-month wonder, or if the firmer pace of domestic demand growth is pushing up prices. There were also substantial increases in prices charged at hotels and restaurants, especially at the former. That too fits a stronger domestic demand background. That said, despite these cost increases, service price inflation was very mixed across the six Laender. Unexpectedly, food prices slowed.

BAADER Klaus