German released data reignites fear of sticky inflation

Today´s German inflation showed that the continuous decline in inflation figures has halted. Although some key figures remained stable in April, the overall picture is that the ECB still has a lot to do.

In this article:

1. Reignition of Inflation

2. RC Forecast

Germany Headline inflation YoY = 2.2%

Several statistical data for Germany were released earlier today ahead of the main inflation data. They painted a picture of a halt in decline in decline and showing signs of reinflation.

Headline inflation came in at 2.2% year-on-year, unchanged from March and still below the 2.5% YoY recorded in February. The European inflation measure came in at 2.4% YoY from 2.3% in March, slightly higher than consensus expectations.

Reignition of Inflation

The latest German inflation figures underscore the dominant influence of energy and food prices on headline inflation, with core inflation showing only marginal relief. Despite an early Easter, we witnessed no significant 'Easter bunny' effect, particularly evident in sectors like leisure, packaged holidays, and hospitality, where prices remained resilient in April.

This persistence in inflationary pressures suggests a continued upward trajectory, potentially reaching 3% next month. Looking ahead, the inflation outlook appears to be shaped by a tug-of-war between delayed monetary tightening effects and mounting challenges like supply chain disruptions due to Middle East tensions and the ongoing German economic recovery.

Market sentiment is further fueled by the resilience in companies' selling price expectations, particularly in the services sector, indicating a sustained inflationary environment. Consequently, we anticipate inflation to oscillate within the broader range of 2% to 3% in the foreseeable future, rather than a linear path towards the 2% target.

RC Forecast

In RC, analysts see the German inflation data as a notice to be cautious and not to expect a smooth path of inflation to 2%. ECB has a lot to consider given the geopolitics developments around the Middle East and Ukraine.

ECB will have to consider Biden´s $95 Billion aid package to Israel and Ukraine.

Given the above developments, RC believes that the ECB shall keep rates unchanged in their next Monetary Policy meeting until further developments point towards a lower inflationary environment.

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