May 30, 2018 / 9:55 AM / in 5 months

Inflation in parts of Germany exceeds ECB target in May

BERLIN (Reuters) - Inflation in some German regions jumped above the ECB’s target rate in May, data showed on Wednesday, pointing to robust consumer demand and feeding into a debate about when the European Central Bank should curb its monetary stimulus.

European Central Bank (ECB) headquarters building is seen in Frankfurt, Germany, March 7, 2018. REUTERS/Ralph Orlowski

Policy hawks at the ECB, including German Bundesbank head Jens Weidmann, want the bank 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 hike 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 Germany’s most populous state, North Rhine-Westphalia, annual inflation shot up to 2.1 percent in May from 1.5 percent the previous month, the data showed. The rise was mainly driven by higher energy, food and transport prices.

In Bavaria, annual inflation jumped to 2.3 percent. It also surpassed the ECB’s price target of just below 2 percent in the states of Baden-Wuerttemberg, Brandenburg and Saxony.

The regional data suggest that Germany’s national inflation rate (CPI) will rise to 2.2 percent in May, Oxford Economics analyst Nicola Nobile said.

The state inflation readings, which are not harmonised to compare with other euro zone countries, feed into nationwide inflation data due at 1200 GMT.

A Reuters poll conducted before the release of the regional data suggested that Germany’s harmonised consumer price inflation (HICP) rate would rise to 1.8 percent in May.

In another sign of rising 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.

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 ECB now faces a classic stagflationary shock, with higher inflation and slower growth,” Nobile said, adding she still expected the ECB to end quantitative easing this year in order to avoid the risk of second round effects on inflation.

Reporting by Michael Nienaber; Editing by Toby Chopra

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