German Inflation Hits 2-Year Low: ECB Rate Cut Looms

German Inflation Continues Its Descent:  September’s Surprising Downturn

Germany’s inflation rate continued its downward trend in September 2023, falling for the second consecutive month. The preliminary estimate for year-on-year inflation came in at 1.6%, lower than August’s 1.9% and below analyst expectations of 1.7%. This marks the lowest inflation rate since February 2021.

Energy Costs: The Primary Driver

The primary driver behind this decline was energy costs, which fell by 7.6% in September compared to a 5.1% decrease in August. The cost of goods also dropped by 0.3% after remaining stable the previous month. However, food prices saw a slight increase, rising to 1.6% from 1.5% in August.

Core Inflation and Services: A Nuanced Picture

Core inflation, which excludes volatile energy and food prices, reached its lowest level since January 2022 at 2.7%, down from 2.8% in August. Services inflation also experienced a minor decrease, falling to 3.8% from 3.9%.

Harmonized CPI: Breaking Below the ECB Target

The harmonized German consumer price index (CPI), which ensures comparability across the eurozone, eased to 1.8% in September, below the expected 1.9%. This figure is particularly significant as it fell below the European Central Bank’s (ECB) 2% inflation target for the first time since February 2021.

Cautionary Notes Amid Positive Trends

Despite the overall downward trend, some economists caution that the inflation problem is not fully resolved. Sebastian Becker from Deutsche Bank Research notes that core inflation remains elevated and may only fall slowly due to continuing wage pressures.

Broader Economic Challenges for Germany

The German economy faces broader challenges beyond inflation. ING has warned that Germany could be stuck in economic stagnation, citing the Ifo index’s fifth consecutive monthly decline in September. Factors contributing to this outlook include a weaker global economy, fears of a cooling US economy, ongoing geopolitical tensions, and domestic policy uncertainty.

Divergent Economic Projections

However, the Deutsche Bundesbank maintains a more optimistic view, projecting German GDP growth to increase from 0.3% this year to 1.4% by 2026.

Implications for ECB Monetary Policy

The recent inflation data from Germany and other major European economies like France and Spain, where inflation has also fallen below 2%, may influence the ECB’s future monetary policy decisions. Some analysts, including Carsten Brzeski from ING, suggest that these lower-than-expected inflation figures could provide strong arguments for considering an interest rate cut at the ECB’s October meeting.

As the eurozone awaits the release of its flash inflation data, all eyes will be on how these trends in German and other national inflation rates will impact the broader European economic landscape and monetary policy decisions in the coming months.