German inflation shows its uglier side
German July headline inflation rose to 2.8% YoY, driven by the expiry of the fuel tax rebate and tentative signs of knock-on effects. Per the full note source, this adds pressure on the ECB to hike in September. Consensus sees EUR/USD at 1.075, with a range of 1.04-1.12, aligned with JPMorgan's 1.10 target for Mar26. The next trigger is the ECB meeting on September 14.
What the desk is arguing
ING argues that German headline inflation finally reflects the full impact of higher energy prices after the government's fuel tax rebate expired on July 1. The 2.8% YoY print, up from 2.3%, shows first tentative signs of knock-on effects on goods, transportation, and healthcare.
Despite the uptick, the desk notes that the current inflation picture remains structurally different from 2022's wave, with half of components below 2% and only a third above 3%. However, these signs will push the ECB toward a September hike.
Where it sits in our coverage
Consensus targets EUR/USD at 1.075 (range 1.04-1.12). JPMorgan sees a 1.10 target for Mar26, while BofA is contrary at 1.04. The desk's view aligns with the upper bound, consistent with a hawkish ECB.
How other firms see it
JPMorgan is aligned with a 1.10 target, expecting a September hike to support EUR. BofA is contrary at 1.04, seeing inflation as temporary. Watch EUR/USD for spillover from the ECB decision.
What the calendar says
No high-impact events in the next 30 days; the next key trigger is the September 14 ECB meeting.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01German July CPI rose to 2.8% YoY, exceeding expectations, due to fuel tax rebate expiry.
- 02Knock-on effects to goods and services add pressure for ECB September hike.
- 03Consensus sees EUR/USD at 1.075 (range 1.04-1.12); JPMorgan aligned at 1.10, BofA contrary at 1.04.
- 04Next catalyst: ECB meeting on September 14.
Market implications
EUR/USD should strengthen toward the 1.10 level as markets price a September ECB hike. Watch the EUR/USD 1.08 handle for initial resistance. Positioning may shift further bullish Euro.
Risks to this view
If German inflation moderates or core inflation declines, the ECB may delay. A worsening energy crisis or recession could also force the ECB to pause, weakening EUR/USD toward 1.04.
Older quick take Quick take Published 13:20 Germany German inflation shows its uglier side The end of the government's fuel tax rebate pushed German headline inflation higher in July. The first tentative signs of knock-on effects will add pressure on the ECB to hike in September The German government's fuel rebate expired on 1 July Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Carsten Brzeski Global Head of Macro Germany's real inflation has finally stood up. The just-released first estimate of July headline inflation shows the full impact of higher energy prices, as July was the first month without the government’s tax rebate on fuel.
German headline inflation increased to 2.8% year-on-year in July, from 2.3% YoY in June. The European inflation measure, more relevant to the European Central Bank, also came in at 2.8% YoY, from 2.4% YoY in June. First tentative signs of knock-on effects Looking at the available components, we are seeing the first tentative signs of knock-on or indirect effects of higher energy prices on the rest of the economy.
Regarding year-on-year inflation, it was mainly energy but also goods, transportation and healthcare price inflation that accelerated in July. On a more positive note, prices for clothing and shoes actually dropped in July compared with June. Maybe some retailers started to sell off their World Cup merchandise after the disappointing performance of the German national team.
Despite these tentative signs of knock-on effects, the current inflation picture remains structurally different from the inflation wave in 2022. In June, around half of the main inflation components were growing at less than 2%, while just over a third recorded inflation above 3%. By contrast, in 2022, more than two-thirds of components were rising by more than 3%, with only around 20% of all components having an inflation rate of less than 2%.
Inflation to increase further, pushing the ECB towards a September hike Looking ahead, the path of headline inflation will be 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. In any case, we still expect some knock-on effects from higher energy prices on transportation costs, food prices and other industrial products over the coming months.
On top of that, the current heatwave in Europe clearly bears an additional inflationary risk. Lower water levels in main waterways could bring new supply chain disruptions, and damaged crops could add to food price inflation. Consequently, headline inflation could still move above 3% over the next few months, before dropping below 2% again next summer.
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