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German CPI & Potential for ECB Action

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There are two major economic events tomorrow which could drive the euro.

First, we have the release of German inflation data. We generally expect this to affirm the flash number provided at the beginning of the month.

Then we have the release of the minutes from the last  ECB meeting. Let’s focus on the former, to address the change in expectations around what the ECB might do this year.

Last week saw one of the highest (preliminary) inflation prints in the eurozone for the month of December in quite some time. And we expect the final data to confirm this.

There is divided reasoning as to why that happened, and whether or not it was a one-off event. Or, perhaps, it marks a new trend of rising prices across Europe.

We might get some more insights with the release of the data for Germany tomorrow. That could help shape expectations a bit.

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Harmonized or Not?

There are two portions of this data that could move the market: CPI and HICP, depending on the results.

Both measure inflation, but from a market perspective, they have different implications.

  • CPI, or Consumer Price Index, is what we all know as inflation. It’s important for fiscal policy and is a leading indicator of what’s going on economically in the eurozone, since Germany is the largest component.
  • HICP, or Harmonized Index of Consumer Prices, is the inflation rate in Germany “harmonized” with the rest of Europe. It is, therefore, the measure that the ECB follows. Hence, analysts use it trying to gauge what monetary policy might be in the future.

What We Are Looking For

The consensus among surveyed economists is that December CPI will come in at 0.5%, just like the preliminary number. This was a significant increase over the prior month and could be interpreted as a sign of consumer confidence, and at the top of the normal range.

Annualized, this would imply a rate of 1.5%, again the same as the preliminary number.

As for the Harmonized ICP, expectations are that it will confirm the 0.6% preliminary figure. This would imply an annualized growth of 1.5% as well, repeating the flash figure.

An increase in inflation would imply the ECB would be more likely to raise rates (reversing the move they made last September), but a disappointing result could dash hopes of that.

What About the Next Move by the ECB?

Speaking of the central bank, money markets are starting to price in the next move by the ECB to be a hike, sometime in early 2021.

Up until the holidays, the outlook was pretty much that the low rates in Europe would continue, following the softer data that we got through most of last year.

Lately, there appears to be more optimism. And if inflation rates start moving higher, it would be seen affirming that view. It might even be that analysts start pulling forward their expectations of a hike, and contributing to the strengthening of the euro.

So, tomorrow’s data could be quite important.

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