Subterranean Homesick Blues German Style

On the surface German inflation trends are excellent. The HICP is decelerating from a meager 1.2% Yr/Yr to 0.7% over six-months to less than one-half of one percent over three-months. The German domestic inflation measure is actually showing no inflation at all over the recent three-months with similar decelerations over the previous periods just as the HICP is showing. Since this is the preliminary report on inflation statistics there is no core inflation reading that yet is available. But the domestic inflation measure offers a lot of details and we can look at inflation trends across that index. Where we look there, we do we find that inflation trends are beginning to creep higher. Inflation diffusion, or its breadth, is up to 54.4% over three-months and six-months after being at 45.5% Yr/Yr.

Below the surface in the inflation trends are starting to shift. There is a bit more price pressure in the pipeline. If the Bundesbank and ECK were getting 'blue' because all the inflation trends were subdued and they were feeling like they had no basis for remaining 'tough' they now have some reason for toughness again.

In Germany, inflation is still decelerating for a few items. But the down-trends appear to be coming to an end. It is also clear that economic growth in Germany is better off than in most of the Euro-Area. Germany has managed to nurture export-led growth and its industrial output and orders are strong even as its domestic demand has been slow in coming around. There are reasons for the Bundesbank to become more cautions on the inflation outlook and for the ECB to join in. For the most part inflation in the Zone is under warps but Germany is the leading European economy and it leads the Zone higher. In this situation the conundrum is more for the ECB than for the Bundesbank but since the Bundesbank does not make an autonomous monetary policy the point is moot.

In this environment the impact of these subterranean shifts has been to put a better bid under the euro. But that trend will take some thinking. It is one thing for the euro to break out of its financial crisis induced fall against the dollar and something else for it continue that rise a lot further. While Germany is showing some signs of a well-rounded recovery SOME signs only) France just today reported a drop in industrial output. Traders, as usual, are looking to put an unambiguous spin on the economic trends and in the Zone you just can't do that. The German economy is looking more solid but it is too soon to say if its strength will pull Europe up by its own bootstraps or if Europe's weakness will drag Germany back down. For the moment though there is a hint of inflation pressure in Germany. And given the track record do not expect Germany's Bundesbank or the ECB to ignore it.

German HICP and CPI details
	Mo/Mo %			Saar %			Yr/Yr
	Jul-10	Jun-10	May-10	3-Mo	6-Mo	12-Mo	Yr Ago
HICP Total	0.1%	-0.1%	0.1%	0.4%	0.7%	1.2%	-0.7%
Core	#N/A	0.1%	0.4%	#N/A	#N/A	#N/A	1.1%
CPI
All	0.1%	0.0%	-0.1%	0.0%	1.1%	1.2%	-0.4%
CPIxF&E	0.1%	0.1%	0.5%	2.7%	1.1%	0.6%	1.1%
Food	0.9%	0.0%	-0.4%	1.8%	4.9%	2.2%	-2.1%
Alcohol	-0.1%	-0.4%	-0.1%	-2.1%	0.0%	0.5%	3.0%
Clothing & Shoes	-1.8%	-0.1%	0.3%	-6.4%	-0.6%	1.1%	1.1%
Rent &Util	0.1%	0.0%	0.0%	0.4%	1.8%	1.3%	-0.5%
Health Care	0.1%	0.1%	0.1%	1.2%	0.6%	0.4%	0.8%
Transport	-0.5%	-0.7%	-0.7%	-7.6%	-3.2%	3.2%	-4.9%
Communication	0.2%	-0.1%	-0.1%	0.0%	-1.3%	-1.7%	-2.1%
Rec &Culture	-0.1%	0.4%	1.8%	8.7%	1.2%	-0.3%	1.9%
Education	0.0%	-0.4%	-0.8%	-4.5%	-7.2%	-1.5%	-5.4%
Restaurant & Hotel	0.0%	-0.1%	0.4%	1.1%	0.0%	1.0%	2.2%
Other	0.1%	0.3%	0.2%	2.2%	0.9%	0.8%	1.4%
Diffusion				54.5%	54.5%	45.5%	--
Type:	Diffusion:Current Compared to			6-mo	12-mo	Yr-Ago	--