German CPI likely to maintain firm trend this year, expected to exert upward pressure on long-term rates

Consumer prices in Germany are expected to maintain a firm trend through this year, which in turn is likely to exert some upward pressure on the annual long-term interest rates. A gradual rise in consumer inflation would reinforce the fact that real short-term interest rates are negative and liable to move even further into negative territory over the next few months.

Germany’s consumer price index (CPI) remained unchanged in August, with the annual inflation rate at 0.4 percent, unchanged from the preliminary estimate. However, there was a small annual increase from the 0.2 percent recorded in August 2015, with the potential for some further limited upward pressure on bond yields.

Food prices declined 0.4 percent m/m with an annual increase of 0.9 percent while household energy prices declined 0.5 percent in August to register a 4.2 percent annual decline. Overall prices in the goods sector fell 0.1 percent for the month with an annual decline of 0.6 percent.

Moreover, the services-sector prices were held up at 0.1 percent m/m with an annual increase of 1.3 percent. There were, however, significant pockets of strength in the data, with annual increases of 2.3 percent for education and 2.0 percent for the hospitality sector while miscellaneous services rose 2.1 percent over the year.

As in the earlier months, low inflation in Germany was mainly because of a drop in oil prices, which fell 5.9 percent. Other energy products’ prices also fell y/y. The only exception was electricity prices that increased 0.7 percent year-on-year. Stripping energy prices, the inflation rate would have been 1.1 percent in August, stated Destatis.

In addition, the European Central Bank meeting passed without any policy changes or signals on Thursday last week, defying expectations of an extension of QE. We now expect that to be announced in December. The ECB made few changes to its economic forecasts, leaving its key 2018 CPI forecast at 1.6 percent.

Meanwhile, the yield on the benchmark 10-year bond, which moves inversely to its price, fell 2 basis points to 0.022 percent, the yield on long-term 30-year note dipped 2-1/2 basis points to 0.603 percent and the yield on short-term 2-year bond remained steady at -0.628 percent, while the German stock index DAX Index traded 0.06 percent higher at 10,440 by 08:20 GMT.