German inflation edges up in August
Following the latest data release, German inflation for August has increased to 2.9% YoY, up from 2.8% in July, primarily driven by higher energy prices. This uptick reinforces expectations for a potential rate hike by the European Central Bank in September, as noted in the analysis from ing-think. Current core inflation remains steady at 2.4% YoY, indicating limited secondary effects across the broader economy, though higher oil prices are the principal driver for this inflationary pressure and could sustain levels above 3% in the near term. The desk views the persistent influence of geopolitical tensions in the Middle East as a critical factor that may dictate future price movements and monetary policy strategies going forward.
What the desk is arguing
The desk posits that the rise in German inflation, now at 2.9% YoY, largely stemming from elevated fuel prices, is positioning the ECB toward tightening monetary policy soon. Per the full note from ing-think, the primary driver remains oil prices, while gas and electricity rates have lingered below previous year levels.
Supporting this outlook is the examination of inflation components, particularly the unchanged core inflation at 2.4% YoY. With the ECB's commitment to controlling inflation and the looming effects of energy prices, the outlook hints at sustained inflationary pressures that could warrant policy adjustments from the ECB.
Where it sits in our coverage
Our FX coverage indicates a consensus target for EUR/USD at 1.075, with notable predictions such as: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's current view aligns closely with jpmorgan, sitting at the upper bounds of projections, indicating a more hawkish stance in light of inflation dynamics.
How other firms see it
General alignment exists among firms such as jpmorgan and gs who foresee upward movements linked to ECB policy shifts. In contrast, firms like bofa are taking a more cautious approach, wary of global growth factors.
Watch EUR/USD closely in the context of ECB rhetoric as rate expectations evolve post-inflation data release.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01German inflation up to 2.9% YoY in August, driven by higher fuel prices.
- 02Core inflation stable at 2.4% YoY, with minimal spillover effects noted.
- 03Geopolitical tensions impacting oil prices could keep inflation above 3% until at least year-end.
- 04Market anticipates ECB rate hike in September based on inflation trajectory.
Market implications
Traders should monitor EUR/USD around the 1.075 mark for any breakdowns or rallies, particularly as ECB commentary intensifies ahead of the expected September meeting. Look for potential volatility driven by energy market fluctuations.
Risks to this view
A significant decline in oil prices or a shift in the geopolitical landscape could reverse inflationary trends, leading to a reassessment of the ECB's tightening path. If core inflation rates were to suddenly increase due to broad-based price rises, market expectations could pivot sharply.
Newer quick take Older quick take Quick take Published 09:20 German inflation edges up in August Higher fuel prices have pushed up headline inflation to 2.9% year-on-year in August German inflation nudged higher in August, putting the European Central Bank on track for a rate hike in September Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Carsten Brzeski Global Head of Macro The just-released first estimate of August headline inflation shows a small uptick in headline inflation on the back of higher energy prices again. German headline inflation came in at 2.9% year-on-year in August, from 2.8% YoY in July. The European inflation measure, more relevant to the European Central Bank, also came in at 2.9% YoY.
Core inflation remained unchanged at 2.4% YoY, while services inflation slowed down for the second month in a row, to 2.8% YoY, from 2.9% YoY in July. Still very little evidence of knock-on effects from higher energy prices Looking at the available components, the August increase is mainly the result of energy price base effects. There were very little signs of knock-on or indirect effects of higher energy prices on the rest of the economy.
In fact, it is currently still only oil prices that are pushing up inflation, while gas and electricity prices are actually still down compared with last year. 3% is the new 2% Looking ahead, the path of headline inflation remains highly affected by the war in the Middle East and oil prices. The recent swings in oil prices have been another reminder that it’s almost impossible to come up with oil price assumptions for any inflation forecast that lasts for more than a few days. However, in our new base case scenario, we are assuming that the war will continue and relief will only come after the US mid-term elections.
Against this background, oil prices would stay higher for longer, pushing up headline inflation to above 3% and keeping it there at least until year-end. Low gas storage levels are likely to lead to higher gas prices over the next weeks, ending up as higher retail prices at the start of next year. Together with some knock-on effects from higher energy prices on transportation costs, as well as the inflationary impact of the drought on food prices and other industrial products, it could now take until the end of 2027 before headline inflation drops below 2% again.
As worrisome as this might sound, the current inflation picture remains structurally different from the inflation wave in 2022. Selling price expectations in both industry and services have again dropped below pre-war levels. At the same time, consumers’ willingness and also financial ability to pay higher prices is much lower than in 2022.
As a result, it will be hard for companies to pass through higher production costs. Instead, margin squeezing will be the game in town. ECB set to hike next week The stage looks increasingly set for another rate hike at next week's ECB meeting.
Not only because some ECB members actually advocated for a rate hike at the July meeting, but since the July meeting, the eurozone economy has shown an almost unexpected resilience to the war in the Middle East. This is partly due to good luck and the fact that Asian competitors were hit harder by the closure of the Strait of Hormuz and lost orders to European competitors, but also due to long-announced fiscal stimulus. At the same time, headline inflation has continued to edge higher, even if other inflation measures like core and services currently give no reason to panic.
With oil prices remaining elevated and the risk of a fresh gas price shock increasing, most ECB policymakers are likely to see the case for another rate hike. Even if the ECB doesn’t like the term, the second rate hike this year would also fall into the category of ‘insurance rate hike’, or maybe more to the ECB’s liking: a rate hike to strengthen the ECB’s credibility and to preempt any possible indirect or even second-round effects from the current energy price shock. Whether the ECB will really go beyond a September rate hike is a completely different story.
With one additional rate hike, the deposit rate would still be within the range the ECB itself calls neutral. Going further would mean that the ECB sees restrictive monetary policy as necessary. But there is a big difference between an economy that has shown resilience and an overheating economy that needs restrictive monetary policy.
We still find it hard to see that in times of public finance woes and surging bond yields, the ECB would really be willing to pour more oil into the fire. Or in other words, it is hard to see that the ECB would be willing to risk a recession to tackle what is still a textbook supply-side shock. Inflation Germany Eurozone ECB Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives.
The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Newer quick take Older quick take
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