Source: Bloomberg

Germany’s headline CPI touched 2% year on year this morning, to much chin-wagging in the German press.

Inflation is a more sensitive political issue in Germany than refugees or indeed any other. In order to bail out the lagging economies of its European partners, Germany has tolerated an aggressively expansionist monetary policy complete with negative interest rates. Germans are savers, and its western and southern neighbors are spenders, so Germans feel with justification that they have traded away part of their pensions to subsidize the freeloaders in France, Spain and Italy. If inflation picks up, Germany will put its foot down.

The headline German inflation number is mainly driven by oil prices. As the chart shows, the oil price, lagged 1 to 12 months, produces a pretty good forecast of German inflation. If the oil price remains stable during the next six months, the headline inflation rate should come down to 1.5%–just at the threshold of Germany’s patience.

But models aren’t perfect and Germans aren’t infinitely patient. We will be watching the German price data for advance warning of a possible showdown in the European Central Bank council.