Consumer Prices

Could Draghi Bow to Pressure?

Mario Draghi, the Italian President  of the European Central Bank
The ECB's Mario Draghi so far appears unimpressed by Germany's growing inflation. Picture source: DPA

Mario Draghi hasn’t been impressed by German inflation concerns so far, but some economists think the time for him to heed the warnings might be nearing.

Annual German consumer inflation saw a surprise uptick in April to 2 percent, marking the second time this year that prices in Europe’s largest economy have slightly surpassed the European Central Bank’s goal of keeping inflation just under 2 percent. The euro zone, too, saw consumer prices rise 1.9 percent on the month, according to new data released Friday.

For German economists, that should increase the pressure on the ECB to review rock-bottom interest rates across the euro zone. While Mr. Draghi gave no such indications after the central bank’s latest governing council meeting on Thursday, some expect the time could come at its next policy meeting in June. Until then, the ECB’s cautious approach leaves financial markets free to focus on other European headaches – like the French elections.

“Draghi continued a very gradual path towards a slightly hawkish stance,” Nordea bank analyst Tuuli Koivu wrote in a research note. “After what happened in March, he was very careful not to say anything that could be misinterpreted in financial markets.”

“We have likely seen the peak of German inflation rates for now.”

Michael Holstein, DZ Bank

The pressure is steadily rising in Germany as inflation goes up. The country’s harmonized index of consumer prices (HICP), a measure unified across the euro zone, rose by 2 percent on a yearly basis in April, the Federal Statistics Office said on Thursday. That was a significant change from last month, when consumer inflation was recorded at 1.5 percent. The same story goes for the 19-nation euro zone, where prices climbed 1.9 percent compared to1.5 percent in March.

To be sure, many economists say the German inflation rate is likely to fall again in coming months, but not by too much. With many Germans going on vacation in April, some of the increase was attributed to calendar effects that led to higher prices for package vacations. There’s also still an effect from growing costs for food and volatile oil prices in the past year.

“We have likely seen the peak of German inflation rates for now,” said DZ Bank analyst Michael Holstein, cautioning that an increase in rent prices would likely prevent a future slump in consumer prices, however.

But the price gains are also a sign of stability. All of the indicators suggest a modest upswing in the Europe’s largest economy this year. In combination with a robust labor market, they will increase German pressure on the central bank’s governing council to adjust is policies.

The ECB had slashed interest rates to record lows and introduced an extensive bond-buying program to boost euro-zone economy, and so far it is sticking to its guns. The ECB earlier on Thursday said it would leave its monetary policy unchanged. “The Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time,” Mr. Draghi read out during a press conference on Thursday.

Mr. Draghi also made clear that the euro zone’s inflation path isn’t quite as strong as Germany’s. Consumer prices in the 19-nation bloc have held at around 1.5 percent. At his press conference, he argued there still weren’t sufficiently clear signs that higher inflation is here to stay.

Still, analysts like Mr. Koivu expect the central banker to give some more concrete indications how he plans to exit from the ECB’s easy money policies at the ECB’s next monetary policy meeting in June. Mr. Koivu added that the German inflation data, positive market impetus due to the results in the first round of the French elections, as well as a tightening of monetary policy by the U.S. central bank, the Federal Reserve, would see yields for European bonds increase in the next weeks.


Tina Bellon is an editor at Handelsblatt Global. Jürgen Röder of Handelsblatt contributed to this piece. To contact the author:

This story was updated Friday at 1200 Central European Time with euro zone inflation numbers for April.

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