German Producer Prices Down 1.4% in September Boosting December ECB Rate Cut Bets

German Producer Prices Signal Softer Inflation Ahead

On Monday, August 21, the German economy was under the spotlight as sentiment toward the broader Eurozone economy continued to deteriorate.

Producer prices declined by 1.4% year-on-year in September, following a 0.8% decline in August. Economists had expected producer prices to fall 0.8% in September.

According to Destatis:

• Energy prices were 6.6% lower in September 2024, compared with September 2023, the main contributor to the drop in producer prices.
• Mineral oil products were 14.4% lower than September 2023, while fuel costs decreased by 16.1% year-on-year.
• Natural gas prices were 10.4% lower across all consumer groups, and electricity prices declined by 9.5%.
• Excluding energy, producer prices advanced by 1.2% year-on-year in September.
• Month-on-month, producer prices fell by 0.5%, contrasting with a 0.2% increase in August 2024.

Producer Prices Signal Weaker Demand

The sharper fall in producer prices suggested waning demand as producers reduce prices in a weakening demand environment. Significantly, economists consider producer prices a leading economic indicator for inflation. Downward trends in producer prices may pass cost savings onto consumers, dampening inflationary pressures.

Furthermore, waning demand for German goods could intensify concerns about Germany’s economic outlook.

Impact on ECB Monetary Policy

The continued fall in producer prices may raise investor expectations of a December ECB rate cut. Last week, the ECB cut interest rates by 25 basis points while maintaining a data-dependent approach for the December interest rate decision.

Weakening demand and the gloomy economic outlook may pressure the ECB to cut interest rates further. However, to cement expectations for a December ECB rate cut, CPI reports from the Eurozone must show signs of weakening demand.

EUR/USD Response to German Producer Prices

Before the producer price figures, the EUR/USD climbed to a high of $1.08713 before falling to a pre-data low of $1.08579.

However, following the producer price report, the EUR/USD fell from $1.08596 to a post-data low of $1.08557.

On Monday, October 21, the EUR/USD was down 0.09% to $1.08557.