Release: CPI m/m (December Prelim.)
Consensus Forecast: 0.8%
Previous: 0.0%
Release: CPI y/y
Consensus Forecast: 2.2%
Previous: 2.4%
Date/Time: 12/30/11 (Tentatively Scheduled)
Will Rising Inflation Limit Germany's Appetite for ECB Easing?
As we wind down the year, we have an interesting release coming out from Europe which is the December preliminary reading on consumer prices from Germany. We all know that Germany is the main economy in the euro zone and German authorities have important sway at the European central bank - limiting the bank from undertaking quantitative easing selectors being done in the US and UK.
The expectation for inflation is a 0.8% monthly increase compared to Novembers flat reading on prices. In annual terms inflation is expected to cool to a 2.2% rate from 2.4% previously.
The chart above we do see German inflation peaking somewhat and further move downward would be supportive of a more aggressive ECB.
We have already seen the most populous state in Germany reporting its data with prices cooling.
From Nasdaq: "Consumer prices in the German state of North Rhine Westphalia increased 0.7% in December, driven by a jump in the cost of holiday travel and accommodation, the state's statistics office said Wednesday. On an annual basis, consumer price inflation was 1.7% in December in North Rhine Westphalia, which is Germany's most populous state."
Each German state reports inflation on their own and therefore the total CPI for Germany has a smaller effect on markets.
While the data from Westphalia suggests annual prices remain tamer, if inflation comes in stronger-than-expected that would put pressure on the ECB to keep rates at the current 1% and may limit the hand of the ECB in terms of extra easing of monetary policy. German central bankers are loath to see inflationary pressures build up and have cited the fears of hyperinflation as a key reason they do not want to see the ECB undertaking quantitative easing.
In Europe as a whole consumer prices have remained stubbornly at the 3% level for several months.
The news of the ECB balance sheet hitting a record high of 2.73 trillion euros (chart below) likely had something to do with the drop in the euro on Wednesday and it will be interesting to see how German authorities respond to calls for more easing amid inflation which continues to run higher than the ECB's target.
That outgoing member of the ECB executive board Lorenzo Smaghi said that if a deflationary scenario presents itself the ECB should use QE. Therefore were going to have to closely monitor inflation that data out of Germany and the wider euro zone the coming months.
From SFGate: ""I do not understand the quasi-religious discussions about quantitative easing," Bini Smaghi, who will leave his post at the end of the month, said in an interview published yesterday by the Financial Times. The ECB confirmed the comments. "It is appropriate if economic conditions justify it, in particular in countries facing a liquidity trap that may lead to deflation."
Central banks are given a clear mandate, to achieve price stability, and the independence to achieve it through the instruments they consider most appropriate," Bini Smaghi said. "If conditions changed and the need to further increase liquidity emerged, I would see no reason why such an instrument, tailor made for the specific characteristics of the euro area, should not be used."
The German data therefore is one key consideration in the path forward for the ECB and therefore worth noting as we end the year. Coincidentally we will also get data on the European money supply which is expected to show growth of 2.5% annual pace in November.
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