MNI 5 THINGS: GER HICP Data To Calm Markets After Draghi Stir

By Jaspreet Sehmi

     LONDON (MNI) - Thursday's preliminary inflation data from Germany, the

Eurozone's largest economy, could come under greater scrutiny than usual after

comments from ECB President Mario Draghi on the bloc's inflation outlook caused

a stir in markets earlier this week. Median consensus projections point to

unchanged CPI readings in September and a 0.1% m/m pick-up in HICP inflation,

which is expected to keep the annual rate steady at 1.9% y/y. In August,

inflation on the national CPI and the ECB's preferred EU-harmonised HICP

measures registered at 0.1% m/m/2.0% y/y and 0.0% m/m/1.9% y/y respectively.

     Ahead of the release, we highlight five points for your attention:

     Consensus Forecasts Becoming Increasingly Reliable: MNI's analysis of

actual vs. consensus historical data shows that analysts have simultaneously

correctly predicted the September CPI and HICP inflation rates (m/m and y/y)

three times over the past decade, with two of these occasions falling in the

last two years. While the earlier part of the past decade shows a more mixed

picture, the maximum miss (both to the upside and downside) was just 0.1pp.

September m/m CPI and HICP inflation over the past ten years averaged at 0.0%

and -0.1% respectively. This suggests some downside risk to expectations of a

0.1% rise in prices on both measures.

     Oil Prices To Keep Headline Inflation Higher For Longer: Brent crude oil

prices hit a four-year high of just over $82/b earlier this week, and factors

including heightened geopolitical tensions have increased the likelihood of

further significant rises ahead. This will keep annual inflation higher for

longer. We expect it to hold near the ECB's target of 'below but close to 2%'

throughout Q4.

     Temporary Factors Behind Recent Core Inflation Decline: Core CPI growth

moderated by a tenth of a percentage point to a 10-month low of 1.3% y/y in

August. The recent easing in core inflation, which excludes volatile energy and

food prices, is primarily due to temporary factors and base effects. Last

month's decline came on the back of a drop in education services prices, as a

number of German states reduced or abolished preschool fees as part of a drive

to decrease the burden on working parents. Despite these latest developments,

core inflation has gradually trended higher since the beginning of 2016. We

expect core inflation to resume rising in the coming months and to maintain an

upward trend next year, as wage increases filter through to higher consumer

prices.

     'Super-Core' Measure Gives Healthier Picture Of Underlying Inflation

Dynamics: Developments in 'super-core' inflation, a measure which not only

excludes energy and food prices, but also strips out components considered to be

relatively unresponsive to domestically-generated price pressures, have painted

a more robust picture of underlying inflation - both in Germany and the wider

Eurozone - in recent months. As the ECB continues with its gradual policy

normalisation, policymakers are likely to place greater emphasis on the

'super-core,' rather than the standard core, inflation measure.

     Draghi Causes A Stir: In remarks before the European Parliament's Economic

and Monetary Affairs Committee, ECB President Mario Draghi referred to a

"relatively vigorous pick-up in underlying inflation." Markets interpreted this

as a hawkish shift by the ECB, triggering a spike in the euro and eurozone bond

yields. This response looks to have been overdone. When put into the context of

his full-length statement, it is clear Draghi was referring to ECB projections,

rather than current developments. The central bank's latest forecasts see annual

core inflation picking up from 1.1% this year to 1.5% in 2019 and 1.8% in 2020.

While we also see core inflation trending higher over the medium-term, we

believe these projections are overly-optimistic and expect them to be revised

down accordingly in forthcoming forecast rounds.

--MNI London Bureau; +44 207-862-7489; email: ukeditorial@marketnews.com

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