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Blog Carsten Brzeski

Germany: Stable inflation fails to give new guidance

German inflation remained broadly unchanged in July, giving no further guidance for the ECB
Based on the results of six regional states, German headline inflation increased somewhat unexpectedly to 1.7% YoY in July, from 1.6% YoY in June. On the month, German prices increased by 0.4% MoM. Based on the harmonised European definition (HICP), and more relevant for ECB policy making, headline inflation remained unchanged at 1.5% YoY.

Looking at the available components at the regional levels shows that lower energy prices, the continued decline in communication costs and lower prices for services were broadly offset by somewhat higher prices for consumer goods.

With almost everything being stable, today’s inflation data from Germany does not bring any kind of new signals to the ECB; at least not in the short run. From a more structural perspective, however, today’s inflation data once again underline the ECB’s current dilemma: a cyclical upswing without significant inflationary pressure. If even an economy which has just entered its ninth year of economic expansion and which has record high employment and record-breaking confidence indicators does hardly show any inflationary pressures, how could the Eurozone as a whole do so any time soon?

Even worse, lower oil prices and a stronger euro clearly argue in favour of cyclical downward pressure on inflation in the coming months. On top of that, downward pressure on prices due to higher transparency and competition through digitalization and downward pressure on wages, stemming from globalization, automation or slack are likely to keep inflationary pressure structurally low. All of this means that five years after Mario Draghi’s famous whatever-it-takes speech the economic nightmares of many Germans have still not come true. Despite QE and negative interest rates, hyperinflation or even a disorderly acceleration of inflation is still far away from becoming reality.