Germany: Core inflation dynamics might remain strong for now – Deutsche Bank

Preliminary data released on Tuesday showed a larger-than-expected decline in annual inflation in Germany to 10%. According to Sebastian Becker, Senior Economist at Deutsche Bank, the downward surprise is largely explained by the unexpected energy price drop. He warns that core inflation dynamics might remain strong for now.

Key Quotes: 

“Today's downward CPI surprise has further nourished hopes that the inflation peak might be near (or could already be behind us). However, we reckon that the lower-than-expected November print for the year-over-year CPI inflation rate can be largely attributed to the unexpected drop in the CPI energy price component (and not ebbing core inflation dynamics). Although lower crude oil prices and a stronger EUR exchange rate might help further to tame energy price inflation in the near to medium term, we believe that electricity and gas prices might still climb considerably further – and hence might be only dampened more substantially once the "energy price brakes" take effect in early 2023.”

“Moreover, in our opinion core inflation dynamics might remain strong in the foreseeable future as companies might still have to pass over significant parts of their higher input costs to their customers.”

“Overall, we expect the CPI inflation rate (annual average) to reach a high 8.1% in 2022 before easing to around 7.5% in 2023 and 3.8% in 2024. That said, we expect that the introduction of the "energy price brakes" for gas, district heating and electricity in early 2023 are set to considerably dampen household energy prices and hence headline inflation.”