German inflation remained unchanged in August.
Based on the results of six regional states, German headline inflation came in at 0.4% YoY, unchanged from July. Based on the harmonised European definition (HICP), and more relevant for ECB policy making, headline inflation even dropped, to 0.3% YoY, from 0.4% YoY in July.
Looking at the available components from the regional states, energy prices are still the main driver of headline inflation. As oil prices have increased since March, the negative base effect has faded away. Still, tentative second round effects from low energy prices are keeping the overall level of headline inflation relatively low as prices for consumer goods, in the transportation and communication sector are still dropping.
Today’s German inflation data will not make the ECB’s already difficult life any easier. Ahead of next week’s policy meeting, available data has been too inconclusive to justify any (significant) change to the ECB’s current monetary policy stance. Normally, the staff projections have a so-called cut-off date some ten days ahead of the ECB meeting. This would mean that this week’s set of macro data will not have any impact on the ECB’s staff projections, leaving the projections with a rather benign reaction to the Brexit vote and no hard macro data after the second quarter. Consequently, we expect only very few changes to the ECB staff’s outlook for inflation and growth. Against this background, the ECB will probably try to buy some additional time before making another move. In order not to come entirely empty-handed at next week’s press conference, the ECB could drop the current deposit rate floor for its purchases of government bonds. This would address the increasing problem of bond scarcity and would also buy some time.