Germany: From 1 to 2, to 3, to... German inflation counting - ING

Carsten Brzeski, the Global Head of Macro for ING Research, notes that Germany's headline inflation continued its upward trend in March and will continue to do so in the coming months.

"Based on inflation outcomes of several regional states, German inflation in March came in at 1.7% year-on-year, from 1.3% in February."

"The further acceleration in German inflation is mainly due to higher energy prices. Also, don’t forget that these numbers are still distorted by lockdowns and imputed prices as many goods and services are simply not available."

"With supply chain disruptions, like higher container prices, delivery problems with semiconductors and most prominently, the recent problems in the Suez Canal, producer prices are set to increase further, possibly putting more pressure on consumer prices. Add to this a post-lockdown reflation in some sectors and the reversal of the German VAT rate and for German (and eurozone) inflation, the only way is up. In our view, German headline inflation could eventually range between 3% and 4% in the second half of this year."

"Inflation mainly as a result of supply-side shocks and one-off factors is rather more deflationary than inflationary. This is why the ECB has front-loaded its asset purchases, continuing with very accommodative monetary policy, rather than reacting with any policy normalisation."

"Since the last press conference, the ECB has further clarified its reaction function and its commitment to maintaining favourable financing conditions and to look through (temporarily) higher inflation. Today’s German inflation numbers suggest that this commitment has come not a moment too soon."