From our point of view, several strong arguments suggest that German inflation
is likely to pick up moderately in the medium term. On the one hand, global
capacity utilisation is on a steep upward trend in many countries.
On the other hand, wage negotiations forthcoming in some key German sectors
at the beginning of 2018 (metal industry, public sector, construction industry)
could yield significant increases in (negotiated) wages, as the German economy
is close to full employment. Despite the flatter Philipps Curve, this should put
some upward pressure on core inflation. Given strong growth and sound
employment, we expect the core rate to rise from around 1.4% this year to 1.7%
and 1.9% in 2018 and 2019, respectively.
Leading indicators such as, for
instance, PMI input and output prices have been signalling stronger price
pressure for quite some time (see chart 41). As the upward effect of energy
prices looks set to be much more subdued next year (0.1 percentage points
following 0.4 percentage points in 2017), headline inflation in 2018 ought to
edge down slightly compared with 2017 (falling to around 1.6% from 1.7%) .