Inflation re-accelerated in Germany and drastically slowed in Spain, evidence of uneven progress that’s keeping the European Central Bank focused on further monetary tightening.
(Bloomberg) — Inflation re-accelerated in Germany and drastically slowed in Spain, evidence of uneven progress that’s keeping the European Central Bank focused on further monetary tightening.
The comparison effect from last year, when the Berlin government offered citizens ultra-cheap rail tickets, pushed up consumer-price growth there to 6.8% in June. In Spain, meanwhile, inflation weakened noticeably below the 2% goal targeted by policymakers.
The data show how price trends in the 20-nation euro region continue to vary wildly as the first anniversary of the start of the ECB’s interest-rate cycle approaches. Officials are committed to further action, with another move all but promised for July, and the prospect of a hike in September being currently debated.
Policymakers will pay most attention to euro-zone inflation due Friday, which is likely to show an increase in an underlying measure of consumer-price growth. Evidence of enduring pressure on that so-called core gauge, which strips out volatile elements such as energy, may embolden more tightening.
“Workers have so far lost out from the inflation shock, seeing large real wage declines, which is triggering a sustained wage ‘catch-up’ process,” ECB President Christine Lagarde said on Tuesday. “This is pushing up other measures of underlying inflation that capture more domestic price pressures.”
Money markets are holding on to wagers for a 4% peak rate by December, a position that’s been consistent for more than a week.
It’s in Germany, the motor of Europe’s economy, where such dynamics could be most at risk of taking hold. While inflation picked up there because of the 9-euro ($9.84) monthly train ticket available from June to August 2022, underlying pressures are persisting. Price growth in June was supported by a pickup in services costs, statisticians said.
What Bloomberg Economics Says:
“German inflation increased notably in June and we estimate that core inflation took an even bigger leap and could rise further over the summer. This is mainly due to base effects and weight changes in the consumption basket, but still bad optics for the ECB. We expect two further 25-basis-point hikes in July and September, before the hiking cycle comes to an end.”
—Martin Ademmer, economist. For full note, click here
German officials reckon any slowdown from here will be ponderous.
“Underlying price pressures are likely to remain very high for the time being,” the Bundesbank said in a report on Monday. “This harbors the risk that wage and price setters will increasingly orientate themselves to the higher inflation rates. The decline in inflation may therefore be more sluggish than previously expected.”
That chimes with its forecasts, which suggest a stubborn outlook for prices compared with the rest of the region. ECB projections this month showed inflation slowing to an average of 2.2% in 2025, but the Bundesbank’s prediction for Germany is 2.7%.
While the acceleration in June data there contrasts dramatically with Spain, where annual price growth is now 1.6%, it’s slowing elsewhere too.
Italian statisticians revealed a large drop in the inflation rate there on Wednesday, though at 6.7%, it’s still well above the ECB target. France’s outcome, due Friday, is seen slowing below 6%.
Hours later, the euro-zone data are anticipated by economists to show a slowdown in the headline level to 5.6%, with an acceleration in core inflation to 5.5%.
In an illustration of how Germany impacts the rest of the region, Bloomberg Economics estimated last week that the cheap travel policy may add 0.2 percentage point to the overall number.
While ECB officials aren’t taking any chances on inflation, they can take comfort from an improvement in expectations. A monthly European Commission survey of consumers showed their predictions for price increases fell significantly, with its gauge at the lowest since 2016.
–With assistance from Kristian Siedenburg, Joel Rinneby and James Hirai.
(Updates with Markets in sixth paragraph, BE after seventh paragraph.)
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