February’s headline year-on-year inflation print of 2.2% was the highest in five years and the subject of dramatic headlines in the German press. The main drivers were a 44% rise in heating oil and a 16% rise in gasoline prices. Most of Germany’s CPI for the past several years can be explained by oil and commodity prices. But at today’s oil price of $48, we have seen 10-year inflation expectations embedded in bond yields ranging from 0.4% to 1.3%. Right now we are at the top end of the range, with so-called breakeven inflation at 1.25%. A number of Wall Street strategists are now calling for German core inflation to fall back to close to 1% during the next six months. That would give ammunition to the European Central Bank doves who want to maintain an easy monetary policy.
Has inflation returned to Germany?
Calls for German core inflation to fall back down would give ammunition to ECB doves