May 30, 2018 / 12:17 PM / 5 months ago

German inflation overshoots ECB target in May

BERLIN (Reuters) - German inflation soared more than expected in May, propelled by higher energy costs to its highest level in more than a year and surpassing the European Central Bank’s target of just under 2 percent for the euro zone as a whole.

German consumer prices, harmonised to make them comparable with inflation data from other European Union countries, rose by 2.2 percent year-on-year after an increase of 1.4 percent the month before, the Federal Statistics Office said.

This was the fastest pace since February 2017 and beat a Reuters consensus forecast for a rise of 1.8 percent.

On the month, EU-harmonised prices were up 0.6 percent, the preliminary numbers showed. That compared with the Reuters consensus forecast for an increase of 0.3 percent.

“German inflation is now showing its true colours,” KfW bank economist Joerg Zeuner said, adding that a rate of around 2 percent reflected Germany’s strong upswing.

“It supports the ECB’s path to cautiously exit its unconventional monetary policy,” Zeuner added.

FILE PHOTO: The European Central Bank (ECB) headquarters are pictured in Frankfurt, Germany December 14, 2017. REUTERS/Ralph Orlowski

In another sign of accelerating inflation in the euro zone, Spanish consumer prices rose in May at their fastest pace since April 2017, also topping the ECB’s target level as energy costs went up.

The stronger-than-expected inflation figures are likely to play into the hands of policy hawks, including Bundesbank head Jens Weidmann, who want the ECB to end its asset purchases this year and see room for a rate hike towards the middle of 2019.

But investors have dropped long-standing bets that the ECB would raise rates in June 2019 amid signs of weaker economic growth in the euro zone and market turmoil associated with a political crisis in Italy.

In Portugal, annual consumer price inflation rose to 1.0 percent in May, up from 0.4 percent in the previous month, data from the National Statistics Institute showed on Wednesday.

The euro zone will publish preliminary May inflation data on Thursday, with the annual rate expected to rise to 1.6 percent from 1.2 percent in April, according to a Reuters poll.

The German statistics office did not provide a preliminary reading for core inflation. But regional data from the states suggested that higher prices for energy, food and transport were the main drivers of the surge in May.

“The ECB now faces a classic stagflationary shock, with higher inflation and slower growth,” Oxford Economics analyst Nicola Nobile said.

She added, however, that she still expected the ECB to end its bond purchases this year, to avoid the risk of second-round effects on inflation.

Reporting by Michael Nienaber; additional reporting by Paul Day in Madrid and Axel Bugge in Lisbon; Editing by Maria Sheahan, Larry King

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