Headline inflation has remained stable in November
Based on the results of six regional states, German headline came in at 0.8% YoY in November, unchanged from October. Based on the harmonised European definition (HICP), and more relevant for ECB policy making, headline inflation also remained unchanged at 0.7% YoY; still the highest level since October 2014.
Looking at the available components from the regional states, the fading base effect from low energy prices was offset by lower price increases in services and consumer goods.
Today’s inflation data should prevent the German economic establishment from fearing that their worst nightmares of accelerating inflation due to the ECB’s ultra loose policies will come true. Even if we expect German headline inflation to gradually pick up in the coming months, for an economy that is currently operating at full employment and with a positive output gap, inflation rates around 1% are still extremely moderate and definitely do not signal any overheating in the German economy. Let’s also not forget that globalization should continue to put downward pressure on wages, while e-commerce and the sharing economy are new drivers, keeping inflationary pressures low.
For the ECB, today’s German inflation data are good news. For next week’s meeting, the only technical problem could be the weaker euro which in turn should lead to somewhat higher inflation forecasts in next week’s ECB staff projections; at least for 2017. An upward revision of both the ECB’s growth and inflation forecasts will make it harder for the monetary doves to argue for an extension or even more QE. At the same time, increased uncertainty and no increase in underlying inflationary pressures should in our view be the main and convincing argument for ECB President Draghi to get at least broad support for an extension of QE by 3 to 6 months, combined with some technical tweaks to tackle the scarcity problem. To some extent and only in private, the ECB might not be extremely unhappy with a ‘no’ in the Italian referendum as it would give the uncertainty argument more persuasive power. It would not be the first time ever that the Governing Council’s economic assessment diverts from the staff projections.