Germany’s Inflation Reduction; The Thrill Is Gone?

Globally inflation statistics peaked sharply during the COVID, having since been running down and running down at a pace faster than what central banks had expected. But suddenly, this unwinding of inflation appears to have hit a rough patch and the pace of decline in inflation seems to be slowing or even reversing. German inflation statistics for February are inconclusive on this thought. The ECB-targeted HICP rate in Germany rose 0.2% in February with the core up by 0.4%. Germany's own domestic CPI gauge rose by 0.2% in February with its excluding energy measure up by 0.3%. On the face of it, there's nothing glaring about the monthly inflation data. Inflation diffusion, in fact, is quite tempered with month-to-month inflation rising for only 27% of the categories indicating a continuing tendency for inflation to decelerate.

However, sequential inflation data over 12 months, six months and three months show trends that are more equivocal. For Germany, the HICP index rises 2.8% over 12 months, slows to a 1.6% annual rate over six months, then rises back to a 2.9% annual rate over three months – indicating an acceleration over three months that takes it above its 12-month pace. The core measure for the HICP is up 3.6% over 12 months that tails to 2.5% annual rate increase over six months then jumps to a 4% pace as annualized over three months. The core for the HCP is uncomfortably high.

German domestic inflation shows the headline up 2.5% over 12 months, tailing to a 1.5% annual rate over six months then bouncing back to 2.4% annual rate over three months, reminiscent of the pattern that we see for the HICP headline. The German domestic CPI excluding energy rises 3.1% over 12 months, decelerates to a 2.6% annual rate over six months but then jumps to a 3.2% annual rate over three months, once again, like the pattern for the core HICP, but not as draconian in terms of the three-month rebound. Still, there's enough pressure strength and rebound over three months to be off-putting to the monetary authorities.

German inflation diffusion shows inflation accelerating at 72.7% of the categories over three months; that's up sharply from 36.4% accelerating over six months and 27.3% of them accelerating over 12 months compared to the previous 12 months. The notion of inflation accelerating is therefore a fairly broad-based over three months, but it's also a relatively new event.

The notion of inflation accelerating is more broad-based than just Germany. The earliest statistics from Germany, France, Italy, and Spain show three-month inflation accelerating in all four of the largest European Monetary Union countries compared to their respective six-month pace. These statistics follow, in some sense, the same pattern for Germany where the 12-month inflation rate gives way to lower inflation over six months and then the three-month pace picks up compared to six-months. Spain shows a steady acceleration from 12-months to six-months, to three-months. Spain is the only country among the big four economies to do that. In addition to the pressure shown by German domestic ex-energy inflation, Italian core inflation shows stubbornness as it falls to 2.5% over 6 months compared to 2.7% over 12 months and then sticks at that 2.5% level again over three months.

Oil prices drop over 12 months, six months and three months, looking at Brent oil denominated in euros. However, monthly data show an increase in Brent prices in February of 4.3% on top of a 1.6% increase in January. It's not clear that this minor pressure on oil prices has much to do with the acceleration of inflation. But we do see this acceleration broadly in Europe. We also see it strongly in today's CPI report out of the U.S. It's reasonable to ask whether the best news on inflation is behind us and whether the central banks are going to be able to follow through on these rate cuts that markets have come to expect or whether there's now a new game – and a new trend- in town.