Germany’s Consumer Price Index (CPI) for May shows a yearly increase of 2.1%. This matches the preliminary estimate and remains the same as last month. The Harmonized Index of Consumer Prices (HICP) also indicates a 2.1% rise, consistent with initial figures. Core annual inflation in Germany is 2.8%. This raises concerns for the European Central Bank (ECB), though the ECB plans to pause policy changes throughout the summer.

Stubborn Inflation in Germany

We see confirmation of persistent inflation in Germany, especially when excluding food and energy. The core rate of 2.8% is significant—not because it strays from expectations but because it shows no signs of slowing down. This highlights worries that cost pressures are deeply embedded, a fact monetary authorities will monitor closely even while policies remain unchanged. Schnabel has previously mentioned that understanding short-term drops in inflation is challenging, particularly in Germany where wage negotiations and labor costs can delay a reduction in service inflation. Although the main CPI has leveled off, the ongoing high core figures raise questions about fixed-income products tied to short-term rate predictions. We don’t expect major rate changes soon, as these have been ruled out until after summer, but the data indicate that discussions about deeper cuts are complicated. This means the market might start to price longer rate paths instead of sharper changes. Traders should note that even small differences in upcoming national inflation figures could lead to renewed volatility. Momentum has eased slightly in shorter maturities, and we’ve begun to see a gradual reduction in overly aggressive easing expectations. This trend might reappear if July brings high input costs or strong PMI data.

Keeping an Eye on Inflation and Market Reactions

Lane’s recent comments about monitoring wage growth and service data are relevant. The inflation situation isn’t resolved, and while short-term predictability exists in policy, tightening hasn’t been entirely ruled out by all members of the Governing Council. It’s wise to focus on potential differences between southern and northern inflation figures, as this could impact Bund-BTP spreads or influence OAT demand. In this environment, trades based on strong macro assumptions may feel poorly timed if they are too early. The front-end volatility structures seem mostly priced for now, but realized inflation could lead to surprises. Be ready to adjust your positions if second-round effects begin to accelerate more quickly than expected. Create your live VT Markets account and start trading now.

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