Stock markets hit by US travel ban fears, Dow falls below 20,000 - as it happened

Four weeks ago when the December figure was released, there was an outcry by some media and politicians about rising inflation risks in Germany. The ECB should act by unwinding QE as quickly as possible before it is too late, so the story went. It is likely that you will read such statements once again even the latest headline inflation figure came in a tad below expectations. In our view, this kind of thinking is not based on economic facts for two reasons. First, there are no signs of a persistent upward trend in consumer prices. Instead, it is largely about oil. Second, German private households' inflation expectations remained well anchored.

Let us state the obvious: Rising inflation at the turn of the year has primarily been caused by energy prices, or more precisely by the higher oil price. The latest driver was the agreement between OPEC and non-OPEC countries such as Russia at the end of November to curb output. It was the first agreement of a global oil cartel since 2001. According to our calculations based on federal states data, inflation excluding food and energy was up a more moderate 1.4% year on year after 1.5% in the previous month....

More important, the latest inflation excitement in the media and by some policymakers has been crying wolf as flagged by forward-looking surveys. Private households do not anticipate any surging inflation which goes beyond the energy rise. As a matter of fact, inflation expectations of Germans for the next 12 months hit its trough in spring of last year and rose since then, pretty much in line with what one would expect in the light of the oil price increase. The latest inflation expectations survey for January (conducted by the EU Commission) shows that they still remained below its long-term average. In other words, the allegedly so inflation averse Germans have noticed higher fuel price at the gas stations but they are not really concerned for good reason.

Going forward, we expect further rising inflation rates in a range of 2¼%-2½% year on year for the next three months or so before a stabilisation is kicking in. It will be all about the oil price ... whose effects (on a year on year basis) will be fizzling out in the further course of 2017. On average, we expect +1.8% in consumer prices this year after +0.5% in 2016.

Source: Stock markets hit by US travel ban fears, Dow falls below 20,000 - as it happened