Germany: Inflation shock – ING

According to Carsten Brzeski, Global Head of Macro at ING, the surge in German headline inflation could pose a new communication challenge for the ECB.

Key Quotes:

“ German inflation in January came in at 1.0% year-on-year, from -0.3% in December. The harmonised index, relevant for European Central Bank policymaking surged to 1.6%, also remained unchanged at -0.7% YoY. This was the largest monthly increase in a long time. Before anyone gets too scared, this surge is mainly the result of the reversal of last year’s VAT reduction, higher energy prices and the new carbon tax.

Looking ahead, today’s inflation number is just the beginning of a period of significantly higher headline inflation in Germany. The full impact of higher energy prices compared with last year will show in the coming months. Also, the full base effect from the VAT cut reversal will only be reflected in inflation numbers after the summer. Together with price mark ups in some sectors once the economy starts to reopen again, headline inflation in Germany could be pushed above 2% after the summer.

Recent comments on possible yield curve control, warnings against premature tightening of monetary and fiscal policies as well as more emphasis on symmetry and hence the possibility of inflation overshooting are just a few tools the ECB could use to preserve what seems to be the ECB’s latest treasure: favourable financing conditions.”