German Inflation 3.3%: What It Means for Euro and ECB
Energy pushes inflation to 3.3%, while U.S. core PCE falls to 3.0%. What the rate differential means for the euro.
Key Takeaways
- German inflation jumps to 3.3 percent in September (expected: 3.1 percent).
- Excluding energy and food it is only 2.4 percent, while energy alone is up 14.9 percent.
- U.S. core PCE slips to 3.0 percent, partly due to a new calculation method.
Two inflation readings, one day, two directions: while prices in Germany rise faster than expected, U.S. statistics report relief. For the euro-dollar rate and the central banks, this contrast matters more than any single number.
Berlin versus Washington
Germany's Federal Statistical Office (Destatis) reports 3.3 percent for September, up from 2.9 percent in August. The market had expected 3.1 percent. Claudio Kummerfeld at Finanzmarktwelt attributes the rise to energy: the Iran war keeps oil and gas expensive, and energy prices stand 14.9 percent above a year earlier, versus 10.5 percent in August.
The U.S. tells a different story. The Fed's preferred core PCE gauge rose just 0.2 percent month over month in August; year over year it is 3.0 percent instead of the forecast 3.3 percent. Headline PCE fell from 3.7 to 3.4 percent. Markus Fugmann at Finanzmarktwelt reminds readers that part of this stems from the Bureau of Economic Analysis' revised methodology, which lowers the figure by a few tenths. He reads the fact that yields stood higher after the release than before as market distrust.
Two kinds of inflation, two kinds of worries
In Germany, headline (3.3 percent) and core (2.4 percent) are almost a full percentage point apart. Food prices rise only 0.4 percent, services 2.7 percent. That points to an external cost shock rather than overheated demand. Higher rates curb demand, but not the oil price – a bind for the ECB.
In the U.S. the issue is tightening. The Fed hiked by 0.25 percentage points in mid-September for the first time in three years. For October 28, the CME FedWatch tool most recently showed a 70.3 percent probability of the next move, according to Finanzmarktwelt, before this week's data arrived.
Dates for currency traders
On Friday the U.S. jobs report is due. Economists expect about 90,000 new jobs and 4.1 percent unemployment. A strong report would support rate expectations and thus the dollar, which would likely weigh on EUR/USD. If the labor market falters, the Fed's tightening would lose backing.
At the ECB, the question is whether it treats the energy surge as temporary. If oil and gas stay high, focus shifts to core inflation and with it to the rate differential that supports the euro.