German inflation sends signals: What are they?

German Inflation Continues to Hold Steady

The latest data on German inflation for the month of April has revealed that consumer prices have remained stable, indicating a sustainable cooling of price pressures in the largest economy in the Eurozone.
According to the national standard data released by the German statistical office Destatis on Monday, consumer prices were on average 2.2% higher compared to April of the previous year, the same rate recorded in March.
The core inflation, which excludes the prices of food and energy, has decreased to 3.0% on an annual basis.

Harmonized Price Measure Slightly Increases

On the other hand, the harmonized measure of prices has slightly increased.
What does this mean for Europe’s inflation? The signals coming from Germany have implications for the entire region and, of course, for the European Central Bank (ECB).

Interpreting the German Inflation Data

The consumer price data, in line with economists’ expectations, leaves inflation at the lowest level in the last three years, which will reinforce confidence that stability has been maintained throughout the Eurozone.
The 20-member currency bloc is expected to record average price increases of 2.4% in April, as in March, a result that seems likely unless major surprises come from France or Italy.

With inflation now sustainably approaching the ECB’s 2% target, it appears increasingly likely that the central bank will begin cutting interest rates at the June meeting.
While the Eurozone economy has started to show some signs of recovery, growth remains weak and fragile.
Reducing financing costs would provide the necessary boost.

Deeper Insights from German Price Data

A closer look at the German data leaves room for other, less encouraging interpretations.
Harmonized with other EU countries, German consumer prices increased by 2.4% in April, up from 2.3% on an annual basis in March, with energy being a key driver of the growth.
A similar trend was seen in Spain, with inflation accelerating to 3.4% after the government continued to remove support that had helped keep energy costs from surging.
Meanwhile, Irish price growth dipped to 1.6% from 1.7%.

“The downward trend in German inflation rates observed for a year and a half may have come to an end for now,” stated Commerzbank economist Ralph Solveen, suggesting that inflation rates are expected to rise again in the coming months.
“Risks to achieving the inflation target in a timely manner persist,” noted Fritzi Koehler-Geib, chief economist at the German development bank KfW, highlighting the impact of weak productivity growth and significant wage increases on overall price pressures.

“Overall German inflation has slightly increased in April due to higher energy costs and is likely to make another jump in the coming month because of base effects on transport prices.
However, the general trend is downward,” according to economist Martin Ademmer.