German Inflation Falls in August

By Maria Martinez

BERLIN (Reuters) – German inflation fell more than expected in August, declining to its lowest level in over three years, facilitating a potential interest rate cut by the European Central Bank (ECB) in September.

Inflation eased to 2.0% in August, the lowest since June 2021, attributed to lower energy prices, according to preliminary data from the federal statistics office released on Thursday.

Analysts had predicted a reading of 2.3% in August, following a 2.6% year-on-year increase in consumer prices in July, based on data harmonised for comparison with other EU countries.

“People have more money in their wallets again,” German Chancellor Olaf Scholz noted on social media platform X, highlighting that inflation was declining and real wages have risen for the fifth consecutive quarter. “That’s good, we’ll stay tuned!”

The German data precedes the euro zone inflation release scheduled for Friday.

In the euro area, inflation is projected at 2.2% in August, down from 2.6% the previous month, according to economists surveyed by Reuters.

“The just-released flash estimate of German inflation has everything the ECB needs to continue cutting rates at the September meeting,” said Carsten Brzeski, global head of macro at ING. He noted that the report indicates early signs of a broader disinflationary trend beyond just energy prices.

Markets have fully anticipated an interest rate cut from the ECB at its upcoming policy meeting and possibly at least one more adjustment later in the year.

In August, energy prices in Germany fell by 5.1% compared to the same month last year.

Amid recession fears, the German economy contracted by 0.1% in the second quarter of 2024 compared to the previous three-month period, with a technical recession defined as two consecutive quarters of negative growth.

“Fading inflationary pressure combined with fading growth momentum offers an almost perfect macro backdrop for another rate cut,” Brzeski added.

Core inflation, which excludes volatile food and energy prices, stood at 2.8% in August, down from 2.9% in the previous month.

“This paves the way for a September rate cut, but with services inflation remaining sticky, the easing cycle will be gradual,” warned Franziska Palmas, senior Europe economist at Capital Economics. The think tank predicts the central bank will cut rates quarterly until the deposit rate reaches 2.5%.

Economists are anticipating a challenging trajectory for inflation moving forward.

“From now on, things are, unfortunately, on the up again,” expressed Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, indicating the inflation rate could approach 3% in the next six to twelve months.