German inflation rises strongly driven by energy costs

• German Consumer Price Index rose 2.2% over the year in May, above market expectations of 1.9% y/y increase.
• Energy prices accelerated strongly in May reflecting the oil price surge. 
• With political uncertainty rising in Italy, the asset purchasing is likely to be prolonged until the year-end in June.

German inflation in May surprised on the upside with the 2.2% year-to-year increase in May with the energy prices being the main driver of inflation on both domestic and the harmonized basis. German inflation is currently at the highest level since February 2017. 

“A major reason for the increase in the inflation rate is the price development for liquid fuels, heating oil and motor fuels,” the Federal Statistical Office (Destatis) reported on Wednesday.

While preliminary inflation data are not available in full structure, Destatis is publishing the main inflation components to hint the biggest inflation contributors. Looking at the main component, the food prices rose 3.5% over the year in May while energy prices rose 5.2% y/y and services prices rose 1.9% y/y in May. That means, the the core inflation that strips the headline inflation off food and the energy prices is likely to have remained subdued in May. 

With headline inflation rising, but core inflation remaining subdued, current inflation development in Germany, the Eurozone largest country, is probably not going to complicate life of the ECB policymakers.  The ECB Governing Council is left to contemplate whether current economic slowdown in forward-looking indicators like PMIs is just a soft-patch or the beginning of prolonged downswing in the Eurozone economy. The main inflation target is still way off current development and the untick in headline inflation can easily be blamed on oil prices. 

It is rather the political development in Italy that increases the uncertainty that may weigh on the ECB. While standing pat on policy is ECB’s preferred choice to opt for at times of uncertainty.  The future of the asset purchasing programme is clearly in its prolonging until the year end with the official announcement coming out at the June meeting.

German inflation y/y in selected product groups

Source: Destatis