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German inflation provides ammunition for ECB hawks - ING

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 28, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Carsten Brzeski, Research Analyst at ING, notes that based on the results of five regional states, German headline inflation increased in January to 0.5% YoY, from 0.3% in December, on the back of higher food prices.

    Key Quotes

    “On the month, German prices dropped by 0.8%. Based on the harmonised European definition (HICP), and more relevant for ECB policy making, headline inflation increased to 0.4% YoY.

    Looking at the available components from the regional states, it shows that headline inflation is currently not only kept low by low energy prices but also some tentative second-round effects on consumer goods. At the same time, however, inflation in services and health is clearly above headline inflation, indicating that deflationary forces are hard to find in the German economy.

    Looking ahead, it should take at least until the second half of the year before German headline inflation could at least cross the 1%-threshold again. With the continued slump in energy prices, further second-round effects on other goods and only little pricing power from retailers and producer, it is hard to see a strong acceleration of German inflation any time soon. Even the strong labour market and latest wage increases have done little to push up – at least – core inflation. To the contrary, the first stage of integrating refugees into the German labour market should actually insert downward pressure on wages.

    All of this means that German consumers are currently enjoying the best of both worlds: a strong labour market with decent wage increases and low inflation. The perfect combination for an improvement of German consumers’ purchasing power and hence private consumption. For the ECB, however, the challenge has not become any easier. In fact, German inflation data are welcome arguments for the opponents of additional ECB action.

    In our view, Draghi’s comments at least week’s press conference have pushed the ECB into a delicate dilemma. With again fueled high market expectations, doing nothing is almost entirely out of the question for the ECB. At the same time, the fact that the Governing Council does not seem to have an unanimous view on the need for and effect of additional easing plus the small detail that Bundesbank president Weidmann won’t hold a voting right at the March meeting have clearly increased the risk for disappointment in March.”
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