MNI 5 THINGS: Wages To Exert Upward Pressure On German CPI

By Jaspreet Sehmi

     LONDON (MNI) - July preliminary consumer price inflation data for Germany

is due for release on Monday and will be keenly eyed by ECB policymakers given

that Germany has the largest weighting (just over 28%) in the Eurozone-wide

index. In June, both the national CPI and EU-harmonised HICP indices -- the

latter of which the ECB focuses on for monetary policy purposes -- registered a

marginal 0.1% m/m rise. Meanwhile, annual inflation on both measures receded

slightly to 2.1% from 2.2% in May -- remaining above the ECB's target of 'close

to but just below 2%' for Eurozone inflation. The median consensus projections

point to July readings of 0.4% m/m and 2.1% y/y for both the CPI and HICP.

     Ahead of the release, we bring five points to your attention:

     Impressive Consensus Track Record: MNI's analysis of actual vs. consensus

historical data reveals an impressive insight. On seven occasions over the past

decade, analysts have simultaneously predicted both the m/m and y/y July CPI

inflation rates correctly, including over the past five consecutive years.

Meanwhile, when median projections have been off the mark, there is an

approximately even balance between positive (actual > consensus) and negative

(actual < consensus) surprises -- and in both cases, a maximum miss of only

0.2pp over the period. While the HICP picture is more mixed, the average July

differential was nonetheless zero over the past decade (as with the CPI).

Overall therefore, our analysis suggests a reasonably strong probability of

Monday's data being in line with consensus, particularly in the case of the CPI

numbers.

     Rising Oil Prices To Factor Again In July: Energy price inflation rose to

6.4% y/y in June from 5.1% in May. Brent crude oil prices have hovered in the

$74-79/b range throughout most of July, compared with $46-50/b in July 2017. As

such, energy price inflation will likely see a further acceleration this month.

     Underlying Inflation Gathering Steam -- But Remains Modest: The CPI

excluding food and energy -- a measure of core inflation -- has been rising

gradually since the beginning of 2016. While base effects will likely see the

core rate continue to fluctuate in H2, it is clearly on an upward trend. We

expect this trend to extend into next year -- providing a key impetus for the

ECB to push ahead with a first rate hike sometime in autumn 2019 (as signalled

to markets).

     Cost-Push Drivers Persist: Three cost-push factors -- namely a tightening

labour market, rising commodity prices and a softer euro -- will continue to

stoke inflation in H2. On the labour market front, nominal wage growth is

strengthening, with a recent series of collective bargaining agreements

reinforcing this trend. Moreover, companies continue to report persistent labour

shortages. Meanwhile, supply concerns suggest that oil prices remain on an

upward trajectory, thereby pointing to further rises in energy inflation going

forward. Finally, the euro has trended lower in recent months on the back of an

uptick in political risk in the Eurozone and monetary tightening in the US.

While growth fundamentals and a large Eurozone current account surplus are

supportive factors for the currency, ongoing political risk and further US rate

hikes could see the euro lose more ground this year and feed into higher

inflation by boosting import prices.

     Solid Growth Dynamics To Keep Inflation Above Eurozone Average: The

expected continuation of Germany's relative economic outperformance compared to

its peers should see its inflation rate stay above the Eurozone average over the

medium-term. In terms of the key drivers, while the outlook for exports is

clouded by global trade tensions, domestic consumption is becoming an

increasingly significant motor of German economic growth.

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

[TOPICS: MABDS$,MAGDS$,MAUDS$,M$B$$$,M$E$$$,M$G$$$,M$U$$$,M$X$$$,M$XDS$]