29 Apr 2016
Germany: Losing their religion? – ING
Carsten Brzeski, Chief Economist at ING, notes that the German headline inflation dropped again into negative territory, denting arguments that ultra-loose monetary policy leads to hyperinflation.
Key Quotes
“Despite a drop in unemployment, record high employment, wage increases and, above all, the accursed ultra-loose monetary policy of the ECB, German inflation remains at rock-bottom levels. Based on the results of six regional states, German headline inflation increased in April to 0.5% YoY, from 0.3% YoY in March. 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, from 0.1% YoY in March.
Looking at the available components from the regional states, headline inflation is currently not only kept low by low energy prices but also by some tentative second-round effects on consumer goods and dropping prices in communication. At the same time, annual inflation rates in services and health have also come down, suggesting that any inflationary forces in the German economy are currently hard to find.
Looking ahead, despite the recent increase in oil prices, it should take at least until the second half of the year before German headline inflation could at least cross the 1%- threshold again. Oil prices are currently still lower than in October and November last year, thereby having a downward impact on headline inflation.
At the same time, the latest strengthening of the euro exchange rate has also cushioned the impact from higher oil prices on headline inflation. With external upside pressure on headline inflation, being absent, the only upside pressure on inflation would come from the domestic economy. Here, however, and despite wage increases of more than 3% YoY, evidence of accelerating prices is also very limited.
All in all, yesterday’s numbers show that the March pick-up in inflation was only the result of one-offs and the timing of Easter but not of a structural shift towards accelerating inflation. It might be hard for some German ECB-critics to digest, but even if the strongest Eurozone economy with low unemployment does not show any signs of inflationary pressures, the ECB after all might have a point in continuing its ultra-loose monetary policy.”
Key Quotes
“Despite a drop in unemployment, record high employment, wage increases and, above all, the accursed ultra-loose monetary policy of the ECB, German inflation remains at rock-bottom levels. Based on the results of six regional states, German headline inflation increased in April to 0.5% YoY, from 0.3% YoY in March. 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, from 0.1% YoY in March.
Looking at the available components from the regional states, headline inflation is currently not only kept low by low energy prices but also by some tentative second-round effects on consumer goods and dropping prices in communication. At the same time, annual inflation rates in services and health have also come down, suggesting that any inflationary forces in the German economy are currently hard to find.
Looking ahead, despite the recent increase in oil prices, it should take at least until the second half of the year before German headline inflation could at least cross the 1%- threshold again. Oil prices are currently still lower than in October and November last year, thereby having a downward impact on headline inflation.
At the same time, the latest strengthening of the euro exchange rate has also cushioned the impact from higher oil prices on headline inflation. With external upside pressure on headline inflation, being absent, the only upside pressure on inflation would come from the domestic economy. Here, however, and despite wage increases of more than 3% YoY, evidence of accelerating prices is also very limited.
All in all, yesterday’s numbers show that the March pick-up in inflation was only the result of one-offs and the timing of Easter but not of a structural shift towards accelerating inflation. It might be hard for some German ECB-critics to digest, but even if the strongest Eurozone economy with low unemployment does not show any signs of inflationary pressures, the ECB after all might have a point in continuing its ultra-loose monetary policy.”