Be it headline or core German inflation is headed lower. Despite being the strongest large economy in Europe, Germany is not building inflation pressure. Its diffusion reading over three-months is only 18% meaning that inflation is increasing over three-months compared to six month in only 18% of the categories. Its headline CPI is flat and Core CPI is up at a 0.7% annual rate. Those numbers are ‘good’ even by tough German standards. The weakness in the countries of the Zone surrounding Germany and dropping commodity prices are helping Germany to control its inflation rate even as the euro has dropped and sent a jolt of stimulus to German exporters.

Despite concerns about transmitting economic weakness from the rest of EMU, recent German industrial production and real orders have firmed. Contrast that to its readings for the industrial sector in the EC Commission survey which has dropped in June to a -8.4 reading from -5.8 in May and +1.6 as the year began. Also Germany’s MFG PMI reading for June on the Markit index fell to 45.04 from 45.19 in May and compares to 51.02 back in January. Its services PMI slipped to a declining mode in June at 49.91 from 51.76 in May and 53.75 in January.

Activity in Germany remains a bit of an enigma as recent German real orders are increasing and as May’s industrial output rose by 1.6% and is accelerating from 12-mo to 6-mo to 3-mo culminating in a three-month rate of growth of 6.7% at an annual rate over three-months.

Germany, like the US, has many cross currents in play. But so far, just as in the US inflation is not stirring on much of any measure. Money supply growth in EMU has finally picked up to 6.4% annualized over three-months but credit demand is still falling away.

There are no inflation metrics to be concerned about save that the weak euro could prompt some to be wary about the future. So far the more ‘sensitive’ EU Commission and Markit PMI surveys do not show any lift to German industry from the newly weakened euro. But the actual IP data and real orders do show more enduring strength than either of these surveys are implying. And while the German IFO survey has showed some weakening, for the most part, it is still at historically firm levels. For example the IFO all sector climate index is stronger than its June value only 26% of the time. Manufacturing emerges as the weakest of Germany’s sectors in that report as the MFG index is weaker than its current level 48% of the time so it is near its historic midpoint value. But the rest of the economy is much stronger than that.

Germany remains, in its own right, an enigma in the Zone. It goes its own way and for a while, at least, it seems to be fighting off the grip of weakness in the rest of the Zone. Diffusion indices show Germany is more caught in the grip of that slowdown than do traditional economic barometers concede. Time will tell which forces are really winning this tug of war.

Whatever the question is, the answer is not inflation. Inflation is dead in Germany. Growth remains an issue.