Stubborn Inflation in Germany and Spain Keeps ECB on Alert

Inflation slowed less than expected in Germany and quickened in Spain, offering European Central Bank officials a partial picture of the region’s price pressures as they judge whether to raise interest rates again.

(Bloomberg) — Inflation slowed less than expected in Germany and quickened in Spain, offering European Central Bank officials a partial picture of the region’s price pressures as they judge whether to raise interest rates again. 

The numbers published Wednesday point to the possibility of a robust outcome when the euro-zone report is released the following day — data policymakers have highlighted as crucial to their Sept. 14 decision. 

Consumer prices in Germany, the region’s biggest economy, rose 6.4% in August from a year earlier, exceeding the median estimate of 6.3% in a Bloomberg survey of economists. 

While inflation in Spain was far lower, at 2.4%, that result marked a second month of acceleration, and an underlying measure stayed far higher.

German bonds pared declines after the release as traders had already accounted for a faster-than-expected pace following the publication of state-wide inflation figures. The yield on German 10-year debt moved 4 basis points to 2.55% compared to 2.59% earlier. Money markets maintained odds on a quarter-point rate hike next month were a one-in-two prospect with a peak close to 4% expected by year-end. 

Any evidence of stubbornly strong consumer-price growth may yet convince the ECB to raise borrowing costs. Officials are weighing if underlying pressures are too strong to risk a pause, or whether a weakening economy can brake inflation without further tightening.

That appraisal augurs what appears for now to be a cliffhanger decision in two weeks’ time. Hawks such as Austria’s Robert Holzmann have already signaled they may push for a hike, while his Finnish colleague Tuomas Valimaki insisted on Tuesday that the outcome is “totally open.”

ECB President Christine Lagarde, in a major speech at the Federal Reserve’s Jackson Hole retreat last week, said that inflation remains undefeated, but she avoided expressing an opinion on what to do. 

What Bloomberg Economics Says…

“The August readings are heavily influenced by base effects and statistical distortions, and we expect inflation to notably decline in the coming months. Still, price gains well above 6% in Europe’s largest economy might add to the case for another interest rate hike at the ECB’s upcoming meeting in September.”

—Martin Ademmer, economist. For full react, click here

Data on Thursday will help complete the view for policymakers, starting with France. Inflation there is anticipated by economists to have resurged to 5.4%. 

The euro-zone outcome due later, concurrently with Italy, is seen likely to show price growth stuck above 5% too, far above the 2% level targeted by the ECB. 

Officials are most focused on the so-called core measure that strips out volatile items such as energy and food. That’s expected to come in at 5.3%, according to the median estimate. 

They’re also looking at expectations to see if consumers may seek higher wages that entrench inflation. A survey released by the European Commission on Wednesday showed households this month raised their outlook for price increases over the next year. 

German inflation was 6.1% based on national methods of calculation, also faster than expected.

“A large part of inflation comes from high import prices for energy,” Chancellor Olaf Scholz said earlier on Wednesday. “It’s good news that reports are coming in that these prices have fallen back and that we can expect that to remain the case and that they will perhaps fall further.”

Germany’s inflation data showcase both the sluggish progress the ECB is encountering in bringing price growth under control, and the gloom gripping the region — also underscored by a fourth month of falling economic sentiment in the European Commission’s report.

Business surveys last week suggested a gloomy outlook for German private-sector activity, undermining the recovery from the winter recession that it barely exited in the second quarter. They signaled rapidly weakening demand has spread from manufacturing to services.  

Whether that effect will be powerful enough to curb inflation is the key question for ECB policymakers. 

–With assistance from Arne Delfs, Iain Rogers, Kristian Siedenburg, Joel Rinneby and James Hirai.

(Updates with markets in fifth paragraph, Bloomberg Economics after eighth paragraph)

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