MNI 5 THINGS: German Inflation To Stay Above ECB Target In Aug

By Jaspreet Sehmi

     LONDON (MNI) - As ECB policymakers return from their summer breaks ready to

pull the trigger on monetary tightening, Thursday's inflation data from Germany,

the bloc's largest economy, will be closely watched. In July, the national CPI

and EU-harmonised HICP indices rose by 0.3% m/m (2.0% y/y) and 0.4% m/m (2.1%

y/y) respectively. Median consensus projections point to August readings of 0.1%

m/m (2.0% y/y) for CPI and 0.2% m/m (2.1% y/y) for HICP, which the ECB focuses

on for monetary policy purposes.

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

     Consensus Estimates Show Improving Track Record: MNI's analysis of actual

vs. consensus historical data shows that analysts have correctly predicted both

the CPI and HICP inflation rates (m/m and y/y) in each of the past four years.

While consensus estimates were less accurate in the preceding six years, the

maximum miss over this period (both to the upside and downside) was just 0.2pp.

Adding an analysis of historical data trends to the mix, August m/m CPI and HICP

inflation over the past ten years averaged at 0.1% and 0.0% respectively. This

suggests that monthly inflation prints tend to be relatively weak in August,

lending credence to the median projection of a 0.1% CPI outturn tomorrow, but

indicating some downside risk to expectations of a 0.2% HICP print.

     Headline Inflation To Hold Above Target: Annual HICP inflation in Germany

has registered above the ECB's target of 'below, but close to, 2%' since May -

and is expected to remain above this threshold in August. While the ECB targets

Eurozone-wide inflation, Germany has the largest weighting (just over 28%).

     Headline-Core Gap To Narrow: Core inflation (HICP excluding food and

energy) fell below the headline rate in December 2016 and has almost

consistently remained beneath it since. Indeed, in recent months, the gap

between the headline and core rates has widened, as energy prices have driven

headline inflation higher. However, as energy price base effects start to work

in the opposite direction, this gap is set to narrow in the coming quarters,

with headline inflation on course to moderate while core inflation firms.

Although the latter is unlikely to reach the ECB's target for a long time, a

gradual uptrend will encourage the Governing Council to start raising interest

rates late next year nonetheless.

     Robust Domestic Dynamics To Lift Core Inflation: The expectation of a

rising core inflation trend is supported by the latest forward-looking survey

data. The inflation components of the German composite PMI survey marched

further ahead in August. Average prices charged for goods and services rose at

one of the fastest rates ever recorded by the survey, as businesses increasingly

pass on some of the burden of higher input costs to consumers. This reflects

strengthening consumer demand, which is set to grow further in the coming

quarters as a healthy labour market and rising wages drive household confidence

and spending higher. Still-low interest rates coupled with higher inflation are

also acting as an incentive to spend as the value of savings depreciates.

Germany's new coalition government has also been seeking to bolster household

purchasing power and approved measures on Wednesday including a reduction in

payroll tax contributions to the unemployment insurance system.

     ECB Hawks Ready To Take Flight: With inflation trends developing in line

with ECB expectations, the central bank is set to push ahead with plans to start

normalising policy from October, with hawks on the Governing Council eager to

unwind the extraordinary monetary stimulus in place since 2014. However, while

the central bank is on course to phase out its bond-buying by year-end, rates

are set to remain on hold until late-2019, giving comfort to the more dovish

members of the council.

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

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