German Inflation Perks Up; Core Rate In Mild Rebound From Lows

The German harmonized inflation rate rose by 01% in May, Germany's domestic headline inflation measure fell by 0.1% with the core up at a sharp +0.5% offsetting last month's 0.4% drop.

Headline inflation in Germany is steadily increasing with the annualized rate climbing over shortening time spans at 1.2% over 12-mos, 1.3%over 6-mos and 2.6% over 12-mos. Core inflation is still tempered at a 1.5% three-month pace in May. But it is not showing clear acceleration as the 1.5% standing is higher than both the Yr/Yr and the six-month pace but the six month pace shows deceleration from 12-months. On balance there are some core pressures but they are not as steady building as for headline inflation.

How widespread is inflation's acceleration? Using the main 11 categories in the table inflation is accelerating over three-months compared to six months in 63% of the categories. It' acceleration over six months compared to 12-months is only in only 36% of the categories. It is accelerating Yr/Yr compared to the pace of one year ago in 54% of the categories. On balance there is evidence of inflation and it is most acute over three-months where the measurement is the least reliable and most volatile. Apart from the 3-month diagnostic, inflation's acceleration does not seem that sharp or widespread.

One key for the ECB is going to be how to deal with oil that has been booming and busting and wreaking havoc with price trends and with inflation more generally. A second key will be to see how it deals with all the financial distress in the region. There is not only financial distress but national austerity plans in train. With all of these negative growth shocks we would expect the ECB to be a bit more inflation-tolerant than it might be in other times. But that is still a question for the policymakers. After all, stimulus is being breathed into the euro-economy by the ever weakening currency. And with that comes some added inflation threat to counter the downside growth risks. What will the ECB do? That is what we will be watching to see. I expect temperance but I am ever wary.

German HICP and CPI details   Mo/Mo % Saar % Yr/Yr   May-10 Apr-10 Mar-10 3-Mo 6-Mo 12-Mo Yr Ago HICP Total 0.1% -0.2% 0.6% 1.9% 1.1% 1.2% 0.0% Core #N/A -0.5% 0.4% #N/A #N/A #N/A 1.2% CPI All -0.1% 0.2% 0.6% 2.6% 1.3% 1.2% 0.1% CPIxF&E 0.5% -0.4% 0.3% 1.5% 0.4% 0.7% 1.2% Food -0.4% 0.6% 1.1% 5.2% 3.9% 1.1% -1.2% Alcohol -0.1% 0.1% 0.3% 1.1% 1.2% 3.1% 1.2% Clothing & Shoes 0.3% 0.2% 0.4% 3.5% 3.8% 1.2% 1.8% Rent &Util 0.0% 0.5% 0.4% 3.3% 2.0% 1.0% 0.4% Health Care 0.1% -0.2% 0.1% 0.0% -0.2% 0.2% 1.4% Transport -0.7% -0.2% 1.1% 0.7% 0.7% 4.1% -3.9% Communication -0.1% -0.1% -0.2% -1.8% -2.7% -1.8% -2.5% Rec &Culture 1.8% -2.7% 1.0% 0.0% -0.4% -0.3% 2.0% Education -0.8% -1.6% -0.6% -11.2% -5.3% -1.3% -5.4% Restaurant & Hotel 0.4% -1.0% 1.3% 2.6% 1.3% 1.1% 2.6% Other 0.2% 0.5% 0.0% 2.6% -0.7% 0.8% 1.3% Diffusion       63.6% 36.4% 54.5% --  Type: Diffusion: Current Compared to 6-mo 12-mo Yr-Ago --