UPDATE 2-German inflation accelerates to 2.9% in April as energy costs soar

German 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. The 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. "Then things will become uncomfortable, including for people who do not drive." 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. 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 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.

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