MNI 5 THINGS: German HICP Falls To Within ECB Target Range

-- Core inflation follows headline lower in Aug, but set to firm going forward

By Jaspreet Sehmi

     LONDON (MNI) - German annual HICP inflation slowed by more than expected in

August, falling to within the ECB's target range, and providing backing for the

case for only a gradual unwinding of monetary stimulus. Annual inflation

moderated to 1.9% from 2.1% in July, while on a monthly basis, prices remained

unchanged, Eurozone-harmonised HICP data released on Thursday by the German

Federal Statistical Office showed. On the national CPI measure, prices edged up

by 0.1% m/m, leaving the annual rate unchanged at 2.0% y/y.

     We highlight five points for your attention.

     - HICP Undershoots Consensus, As Projected by MNI: In its preview of

today's release, MNI analysed historical trends in German inflation data and

found that both CPI and HICP monthly inflation prints tend to be relatively weak

in August (having averaged at 0.1% and 0.0% respectively over the past ten

years). As such, we projected that while the August CPI outturn was likely to be

in line with the consensus forecast (0.1% m/m), there was strong potential for a

downside surprise in the HICP print (projected to register at 0.2% m/m). Today's

data confirmed our expectations.

     - Energy Continues To Apply Upward Pressure: A breakdown of the

non-harmonised data shows that, on an annual basis, price pressures stemmed

mostly from higher energy cost inflation (Aug: 6.9%; Jul: 6.6%), while food and

services inflation slowed on the month (to 2.5% and 1.4%, from 2.6% and 1.6%

respectively in July).

     - Childcare Fee Cuts Drove Core Inflation Lower: Core CPI growth moderated

to 1.3% y/y from 1.4% in July, according to Commerzbank. This likely reflects a

decline in prices for education services. As part of a nationwide drive to

decrease the burden on working parents, a number of states have agreed to reduce

(and in some cases abolish) preschool fees, with some having done so at the

start of August. Looking ahead, we continue to expect a rising, albeit gradual,

trend in core inflation over the coming year, as increasing capacity constraints

put upward pressure on wage growth. This is also true in the wider region.

According to ECB figures, collective wage growth in the Eurozone firmed to 2.2%

y/y in Q2. Together with Germany, collective wages have risen in member states

including the Netherlands, Italy and Spain.

     - Downside Risks For Eurozone Print: Spanish and Belgian preliminary

inflation figures for August were also released today, showing a slowing in

Spain (from 2.3% in July to 2.2%), and an unchanged rate of 2.2% in Belgium.

Together with the German data, this suggests that Eurozone-wide inflation dipped

to 2.0% in August (from 2.1% in July), contrary to market projections of no

change. Going forward, we anticipate that headline HICP growth across the region

will slow over the coming year, as energy inflation recedes.

     - Gradual Policy Normalisation Ahead: While headline inflation is likely to

ease, core inflation is set to firm over the coming quarters, albeit at a soft

pace. Therefore, the ECB still appears on course to end net asset purchases this

year, and to implement a hike in rates in late-2019 - likely in September at the

earliest.

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

--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com

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