Germany’s Consumer Price Index (CPI) for May shows a year-on-year increase of 2.1%, consistent with the preliminary estimate and unchanged from the month prior. The Harmonized Index of Consumer Prices (HICP) also reports a 2.1% rise, aligning with initial figures.

Core annual inflation in Germany is recorded at 2.8%. This could pose concerns for the European Central Bank, although the ECB is maintaining a pause in policy changes throughout the summer.

Stubborn Inflationary Pressures in Germany

What we’re seeing here is the confirmation of stubborn inflationary pressures within Germany, particularly once food and energy are stripped out. The core rate, sitting at 2.8%, is worth noting—not because it deviates wildly from expectations, but because it doesn’t seem to be showing signs of natural retreat. This serves to anchor concerns that underlying cost pressures remain embedded, something monetary authorities will be tracking closely even while decisions are held steady.

Schnabel has previously hinted at the difficulty of interpreting short-term disinflationary trends, especially in economies like Germany’s where wage negotiations and unit labour costs can delay the eventual cooling of service inflation. Even with headline CPI flattening, the persistent elevation in core figures invites scrutiny across fixed-income products, particularly those priced off short-term rate expectations. We’re not expecting drastic rate shifts in the immediate term—indeed, that’s been ruled out until beyond the summer—but the data continue to suggest that any talk of deeper cuts isn’t straightforward.

For us, this translates into a period where market pricing of rate paths may elongate rather than steepen. Traders should remain aware that even small deviations in upcoming national inflation prints across the bloc could reintroduce volatility. Momentum has softened slightly across shorter maturities, and we’ve observed a gradual unwinding of overly aggressive easing bets. That theme could reassert itself if July brings sticky input costs or stronger PMI data.

Monitoring Inflation and Market Reactions

Lane’s recent comments about watching wage growth and services data are pertinent. The inflation story isn’t over, and while there’s short-term predictability in policy, the tightening bias is not fully off the table for all members of the Governing Council. We suggest sharpening focus on potential divergence between southern and northern inflation prints, as this could seep into Bund-BTP spreads or affect OAT demand.

In the current setting, trades built around high conviction macro views may start to feel ill-timed if they’re too early. Theta drift in front-end volatility structures feels largely priced for now, but realised inflation may drive surprises in gamma. Stay prepared to adjust exposure accordingly if second-round effects begin pacing faster than anticipated.

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