FX.co ★ German Inflation Slows More Than Expected

Germany's consumer price inflation decelerated more quickly than anticipated in June, driven by a considerable year-on-year drop in energy prices. The core inflation rate, stripping out food and energy costs, dropped to its lowest level in roughly two-and-a-half years. However, despite the overall cooling, services inflation remained persistently high, signaling that European Central Bank (ECB) policymakers should remain vigilant.

Preliminary data from Destatis, Germany's statistical office, revealed that the consumer price index increased by 2.2% year-over-year in June, down from 2.4% in May. Economists had projected a more modest decline to 2.3%.

This marks the first time in three months that headline inflation has slowed. The harmonized index of consumer prices (HICP) showed an inflation rate of 2.5%, down from 2.8% in May, slightly underperforming economists' predictions of a 2.6% rate.

Core inflation eased to 2.9% from 3.0%, dipping below the 3% threshold for the first time since February 2022 and hitting its lowest point since that month, when it was 2.8%.

"The overall inflation rate may temporarily fall to 2% in the coming months due to lower energy prices," noted Ralph Solveen, an economist at Commerzbank. "However, the core inflation rate is likely to stabilize well above the ECB's target value, indicating that the inflation issue is far from resolved."

Services inflation remained steady at 3.9%, while the rate of increase for goods prices slowed to 0.8% from 1.0%. Solveen attributed this persistence in services inflation to rising wage costs in the labor-intensive sector. Commerzbank predicts that the inflation rate for services will remain near its current level for the foreseeable future.

Energy prices fell by 2.1% after a 1.1% decline in the previous month. Meanwhile, food prices continued to climb for the third consecutive month, with the inflation rate accelerating to 1.1% from 0.6%. Month-on-month, consumer prices edged up by 0.1%, matching the previous month’s pace, compared to economists' forecast of a 0.2% rise.

The EU's measure of inflation, HICP, increased by 0.2% for the second consecutive month.

Looking ahead, ING economist Carsten Brzeski said, "The persistence of inflation at slightly elevated levels is set to continue as favorable energy base effects wane and wages rise."

Brzeski added, "Today’s German inflation figures keep the possibility of another rate cut in September open, though wage developments might prompt some officials to delay the next rate cut until winter."

In June, the ECB reduced interest rates by 25 basis points, lowering the refi rate to 4.25%. This marked the first cut since 2019. Economists anticipate one more ECB rate cut within the year.