The preliminary reading for consumer-level inflation in Europe’s largest economy produced a greater than expected rebound through May. Economists were already projecting a significant pickup in prices through this month on the back of record oil prices. Against an official forecast for a 0.4 percent pickup for the month, inflation in the consumer basket rose 0.6 percent from April - matching the biggest jump in prices in 17 months.
The annualized number touted a similar bullish bias. From last May, prices were 3.0 percent higher. And, while this figure could not breach the multi-decade high set a few months back, it is still greater than the 2.9 percent number expected and far beyond the ECB’s 2.0 percent target. In fact, German inflation has held above the central bank’s target for over a year now. Considering that Germany represents the largest economy in the Euro-Zone - and therefore represents the main component to the aggregate EZ inflaiton reading - these CPI numbers bode well for European consumers but well for euro bulls. With energy prices on a steady rise to record highs, food costs refusing to ease at the grocer level and an expensive currency failing to dampen consumer spending, the risks to inflation are clearly to the upside. In turn, if price pressures stabalize around these highs - or push further above 3.0 percent - the European Central Bank will be pressured to respond with further rate hikes. - John Kicklighter, Currency Analyst for DailyFX.com