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German Wholesale Prices Drop

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German Wholesale Prices Drop

Inflation trends have been updated by the German Department of Statistics in the guise of Wholesale Price Index data for the month of May. These figures are now firmly established in negative territory and the risk is that they feed into real deflation in the economy. Year on year the Wholesale Price Index is now running at -0.9%, this is in fact an improvement on the previous month’s reading of -1.3% and also betters the expected figure of -1.1%. Month on month however the situation has slightly deteriorated, the measure now runs at -0.1% which is down from the April print of 0.2% but it is not as low as the -0.3% consensus estimate.

Last week the German Harmonised Index of Consumer Prices (HICP) sharply dropped from 1.1% to just 0.6%. This almost halving of the key inflation measure set a new 4 year low in the Eurozone’s largest economy, when combined with inflation readings from the other major economies in the bloc the overall price growth in the Eurozone fell from 0.7% to 0.5% for the month of May. This prompted the European Central Bank’s monetary stimulus last week.

Key behind Germany’s falling price activity is a noticeable slowdown in the manufacturing sector. German manufacturing is arguably one of the main inputs into the Eurozone’s fragile recovery and as such produced a shock when it fell sharply and unexpectedly last month. As in other recovering economies there is evidence emerging that the services sector is positioning itself to pick up some of the slack, however it is still too early to expect all areas of a recovering economy to equally contribute to growth.

The unexpected hiccup in the German economy gave the ECB the space it needed to loosen up monetary conditions within the Eurozone. Germany has put up substantial opposition to the ECB’s quantitative easing proposals, perhaps in light of this blip in the German economy, this opposition may soften.

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