LONDON (MNI) – July preliminary consumer price inflation data for Germany is due for release on Monday and will be keenly eyed by ECB policymakers given that Germany has the largest weighting (just over 28%) in the Eurozone-wide index. In June, both the national CPI and EU-harmonised HICP indices — the latter of which the ECB focuses on for monetary policy purposes — registered a marginal 0.1% m/m rise. Meanwhile, annual inflation on both measures receded slightly to 2.1% from 2.2% in May — remaining above the ECB’s target of ‘close to but just below 2%’ for Eurozone inflation. The median consensus projections point to July readings of 0.4% m/m and 2.1% y/y for both the CPI and HICP.
Ahead of the release, we bring five points to your attention:
Impressive Consensus Track Record: MNI’s analysis of actual vs. consensus historical data reveals an impressive insight. On seven occasions over the past decade, analysts have simultaneously predicted both the m/m and y/y July CPI inflation rates correctly, including over the past five consecutive years. Meanwhile, when median projections have been off the mark, there is an approximately even balance between positive (actual > consensus) and negative (actual < consensus) surprises — and in both cases, a maximum miss of only 0.2pp over the period. While the HICP picture is more mixed, the average July differential was nonetheless zero over the past decade (as with the CPI). Overall therefore, our analysis suggests a reasonably strong probability of Monday’s data being in line with consensus, particularly in the case of the CPI numbers.
Rising Oil Prices To Factor Again In July: Energy price inflation rose to 6.4% y/y in June from 5.1% in May. Brent crude oil prices have hovered in the $74-79/b range throughout most of July, compared with $46-50/b in July 2017. As such, energy price inflation will likely see a further acceleration this month.
Underlying Inflation Gathering Steam — But Remains Modest: The CPI excluding food and energy — a measure of core inflation — has been rising gradually since the beginning of 2016. While base effects will likely see the core rate continue to fluctuate in H2, it is clearly on an upward trend. We expect this trend to extend into next year — providing a key impetus for the ECB to push ahead with a first rate hike sometime in autumn 2019 (as signalled to markets).
Cost-Push Drivers Persist: Three cost-push factors — namely a tightening labour market, rising commodity prices and a softer euro — will continue to stoke inflation in H2. On the labour market front, nominal wage growth is strengthening, with a recent series of collective bargaining agreements reinforcing this trend. Moreover, companies continue to report persistent labour shortages. Meanwhile, supply concerns suggest that oil prices remain on an upward trajectory, thereby pointing to further rises in energy inflation going forward. Finally, the euro has trended lower in recent months on the back of an uptick in political risk in the Eurozone and monetary tightening in the US. While growth fundamentals and a large Eurozone current account surplus are supportive factors for the currency, ongoing political risk and further US rate hikes could see the euro lose more ground this year and feed into higher inflation by boosting import prices.
Solid Growth Dynamics To Keep Inflation Above Eurozone Average: The expected continuation of Germany’s relative economic outperformance compared to its peers should see its inflation rate stay above the Eurozone average over the medium-term. In terms of the key drivers, while the outlook for exports is clouded by global trade tensions, domestic consumption is becoming an increasingly significant motor of German economic growth.
By Jaspreet Sehmi
–MNI London Bureau; +44 207-862-7489; email: [email protected]
Source: MNI