German Data Preview (May 29): Inflation to Rise Again Albeit Amid Soft Core Rate Trends?
As we have repeatedly underlined, base effects continue to distort the German HICP/CPI readings and the path down for inflation has not been smooth. This will be even more clearly the case in the looming May numbers where a second successive and slightly larger rise in the headline rate is on the cards. In the April numbers, accentuated by a rise in petrol costs, HICP inflation edged up a notch to 2.4%, above expectations, but there was clearly softer services and core rate inflation, the later down 0.3% ppt, ie to a 27-month low of 2.9%. But more energy effects, albeit less acute than we thought a month ago as petrol prices have started to fall afresh, point to headline inflation moving up to 2.6% but with a stable core reading (Figure 1) and with the adjusted core back down to circa-target strength (Figure 2). Headline disinflation should resume in June!
Figure 1: Inflation Bumpy?
Source: German Federal Stats Office, CE, % chg y/y
It is unclear to what extent recent services price resilience is due to distortion caused by the early Easter and recent fiscal developments. But adjusted m/m readings for April suggested that core rate disinflation may have stalled, albeit at a pace still down from previous rates and largely consistent with 2% target and with softer services evidence emerging in those April numbers. But the May data may point to fresh softening as far as underlying core inflation is concerned, ie looking at seasonally adjusted m/m numbers (Figure 2)
As for those April details, consumer price inflation was pushed up by a rise in road fuel prices, housing energy bills and food costs. In contrast, a drop in package holiday prices and a more muted rise in transport service costs had a dampening effect. Further rises in fuel costs beckon for May data, where headline inflation is likely to climb to at least 2.6% but where the general downtrend seen of late should resume thereafter with the headline dipping below 2% in late Q3. NB: according to the Bundesbank, the rate could jump back to around 3 % in May, a reflection of base effects due to the introduction of the “a year ago.
Figure 2: Adjusted Core Rate No Longer Falling?
Source: German Federal Stats Office, CE, % chg m/m, seas adjusted