German inflation leaps past ECB target in May

Inflation in Germany jumped in May to 2.2 percent year-on-year, preliminary figures from statistics authority Destatis showed Wednesday, outstripping analysts’ expectations.

Analysts surveyed by data company Factset had forecast an increase to just 1.9 percent.

But the 0.6-percentage-point jump compared with April soared past such predictions.

Inflation also surged to 2.2 percent when measured using the Harmonised Index of Consumer Prices (HICP), the European Central Bank’s preferred yardstick in its pursuit of eurozone-wide price growth just below 2.0 percent.

With oil prices headed upwards over the past month, energy accounted for much of the faster pace of inflation in May — jumping from 1.3 to 5.2 percent.

But price growth in services, a much weightier component of the inflation index, also increased sharply, from 1.5 to 1.9 percent.

Analysts noted that some of May’s increased inflation was down to one-off effects, such as pricier leisure spending due to the large number of public holidays over the month.

But they added that higher inflation in the German economy at the same time as financial markets fear an Italian exit from the eurozone could make life difficult for the ECB.

Frankfurt policymakers are weighing when to end their 30-billion-euro ($34.9 billion) per month mass bond-buying (“quantitative easing” or QE) scheme, designed to stoke inflation across the currency bloc.

Inflation overshooting in Germany is a signal that the central bank may have done enough to fuel growth.

But removing demand for Italian bonds when private-sector investors are already shying away could increase Rome’s borrowing costs and threaten financial stability across the 19-nation eurozone.

“It increasingly looks as if the big question for the ECB is not when to stop QE but rather when to signal an extension of QE,” ING Diba bank economist Carsten Brzeski said.

“With (the) latest market turmoil and political tensions in Italy, giving some certainty in times of uncertainty could be the ECB’s preferred policy choice.”

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