UPDATE 3-German inflation accelerates to 2.9% in April as energy costs soar

Economists welcomed the absence of so-called second-round effects - where higher costs of staples, such as energy or food, are passed ‌on by companies to consumers and lead to higher pay demands - but warned that could change if the conflict drags on. German EU-harmonised inflation rose to 2.9% year-on-year from 2.8% in March, according to preliminary data from the national statistics office, largely driven by a 10.1% year-on-year spike in prices of oil and natural gas.

German headline inflation picked up in April ‌due ​to surging energy prices fuelled by the war in Iran, data showed on Wednesday, though a drop in core inflation showed cost pressures had yet to spread across the broader economy. Economists welcomed the absence of so-called second-round effects - where higher costs of staples, such as energy or food, are passed ‌on by companies to consumers and lead to higher pay demands - but warned that could change if the conflict drags on.

German EU-harmonised inflation rose to 2.9% year-on-year from 2.8% in March, according to preliminary data from the national statistics office, largely driven by a 10.1% year-on-year spike in prices of oil and natural gas. CORE INFLATION DROPS

The headline reading came below a 3.1% rise forecast by analysts in a Reuters ‌poll, while core inflation, which excludes volatile food and energy prices, eased to 2.3% in April from 2.5% in March. "What matters now is that core inflation remains untouched by the oil shock," said ‌Alexander Krueger, chief economist at Hauck Aufhaeuser Lampe Private Bank.

ZEW economist Friedrich Heinemann also welcomed the absence of the broader effects of surging energy prices, but cautioned it might be a matter of time before such indirect effects showed up. "However, the longer the blockade of Hormuz continues, the more likely it becomes that the inflation process in Germany will broaden," Heinemann said, referring to the effective closure due to the war of the strait through which around 20% of the world's oil and ⁠natural gas usually ​passes. "Then things will become uncomfortable, including for people who ⁠do not drive." The fact that there was no jump above the 3% mark in April was largely thanks to lower services price inflation, said Sebastian Beckers, economist at Deutsche Bank Research.

Services inflation fell to 2.8% from 3.2% in the previous month. "With ⁠every day that energy prices remain high, the likelihood increases that the energy price shock will work its way more deeply into the basket of goods and eventually lead to rising core and food price inflation as well," ​Beckers said.

GOVERNMENT MEASURES DID NOT STOP PRICES The German government has already accounted for higher energy prices in its updated economic forecasts and now expects inflation to accelerate to 2.7% this ⁠year and 2.8% in 2027, compared with 2.2% last year.

Germany's lower house of parliament approved initial measures to curb surging fuel prices at the end of March under which petrol stations could increase prices only once daily, at midday (1000 GMT). "The 12 o'clock rule ⁠at ​petrol stations has failed as a price brake and was therefore unable to slow inflation in April," Heinemann said.

The German data comes ahead of the euro zone inflation release on Thursday. Inflation in the bloc is expected to accelerate to 2.9% in April from 2.6% in the previous month, according to economists polled by Reuters. The European Central Bank is expected to keep interest rates on hold at ⁠a meeting on Thursday, but hikes are likely to be on the table at the next meeting in June.

"The fact that German core inflation actually dropped should provide the ECB with ⁠some comfort, at least in the near term," said Carsten ⁠Brzeski, global head of macro at ING. But looking further ahead, Brzeski said calls for ECB rate hikes would get louder.

The indicator for price expectations calculated by the Ifo Institute rose to 31.6 points in April from 25.5 points in March, the highest level since January 2023. “Companies are now ‌increasingly passing on rising energy costs to ‌their customers,” said Timo Wollmershaeuser, head of forecasts at Ifo.