Analysts at ING explain that the May drop in German headline inflation should be another reminder that the current cyclical upswing in the Eurozone takes place without inflationary pressure.
Key quotes:
"Based on the results of six regional states, German headline inflation dropped to 1.5% YoY in May, from 2.0% YoY in April. On the month, German prices decreased by 0.2% MoM. Based on the harmonised European definition (HICP), and more relevant for ECB policy making, headline inflation even dropped further, to 1.4% YoY, from 2.0% in April."
"Looking at the available components at the regional levels shows that the drop in headline inflation was mainly driven by lower energy prices, the continued decline in communication costs and a reversal of the Eastern-related price increase in vacation trips."
"Today’s German inflation data should take further pressure off the ECB to wind down its monetary stimulus. The data actually shows that the current cyclical upswing in the Eurozone does not (yet) coincide with a pick-up in inflation. Goldilocks or not, if even an economy which has just entered its ninth year of economic expansion and which has record high employment does not show any inflationary pressures, how could the Eurozone as a whole do so any time soon?"
"Going forward, the single most important variable for the ECB to decide on significant policy changes will be wages. Draghi has repeatedly called them the ECB’s lynchpin. The German experience, with nominal wage increases of a decent 2% to 3%, but also the US example, with low wage increases despite unemployment rates of around 5%, both show that it can take a while before wage development in the Eurozone will signal an ECB policy move. On top of domestic factors like ageing, still high unemployment and negative output gaps, broader factors like digitalisaton and globalization should continue inserting disinflationary pressure on the Eurozone."
"All of this means that the ECB will be in no rush to drastically change its current policy stance. Yesterday, ECB president Draghi already set the tone for next week’s ECB meeting. It should be a meeting which will deliver some important tweaks in the communication, as for example the balance of risks and forward guidance, gently preparing the grounds for 2018 tapering. However, preparing for something and actually doing it are two different worlds in the current ECB universe."
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
EUR/USD stays below 1.0800 after upbeat US data
EUR/USD stays under bearish pressure and trades slightly below 1.0800 in the American session on Thursday. The data from the US showed that the real GDP growth for the fourth quarter got revised higher to 3.4% from 3.2%, supporting the USD and weighing on the pair.
GBP/USD stays in daily range above 1.2600
GBP/USD fluctuates in a narrow channel above 1.2600 on Thursday. The better-than-expected Initial Jobless Claims data from the US and the upward revision to the Q4 GDP growth helps the USD stay resilient against its rivals and limits the pair's upside.
Gold clings to strong daily gains above $2,200
Gold retreats from daily highs but holds comfortably above $2,200 in the American session on Friday. The benchmark 10-year US Treasury bond yield stays above 4.2% after upbeat US data and makes it difficult for XAU/USD to preserve its bullish momentum.
XRP price falls to $0.60 support as Ripple ruling doesn’t help Coinbase lawsuit against SEC
XRP programmatic sales ruling by Judge Torres was completely rejected by another US Court that ruled in favor of the SEC in a lawsuit against Coinbase.
Portfolio rebalancing and reflation trades emerge into Q2
Yesterday’s price action pointed at a possible end-of-quarter portfolio rebalancing as the session saw the laggards of the quarter like Apple and Tesla gain, and the stars like Microsoft and Nvidia retreat.