German CPI - Inflation gradually moving higher rather than spiking up
·Taking stock of German CPI data for 2007 implies a trend increase in underlying inflation rather than a VAT induced one-off spike.
·Although both goods inflation and service inflation jumped by 0.6% in the y/y rate, the pass through seems only complete in the service sector. In terms of goods inflation more is likely to come.
·This would be consistent with surveys among retailers and service providers prior to the VAT hike as well as the experience of the last VAT hike in 1998.
·All in all for the coming 12 months or so a trending up of CPI-inflation to 2.2% seems the most likely scenario. This would be bolstered by current cost trends.
·Offsetting effects from the spike in energy prices and a stronger euro might temporarily disguise the up-trend.
Asset conclusions: VAT pass-through likely to protect profit margins, but contribute to ECB rates beyond 4%.
© Graham Bishop
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