Germany's inflation rate for September has dropped to its lowest since the Russia-Ukraine conflict, signaling that the era of high inflation might be drawing to a close. This further solidifies expectations that the European Central Bank (ECB) will halt its interest rate hikes.
On Wednesday, September 28, data released by the German Federal Statistical Office revealed that the preliminary year-on-year Consumer Price Index (CPI) for September sharply decreased to 4.5% from 6.1% in August, cooling more than anticipated. The month-on-month preliminary value remained consistent with the previous and expected value at 0.3%.
The harmonized CPI for September dropped to an initial year-on-year value of 4.3%, below the market expectation of 4.5% and significantly lower than the previous value of 6.4%. The month-on-month increase was 0.2%, slightly below the 0.3% expectation.
Following the data release, German government bonds continued their decline, with the yield on the 10-year bond rising by 10 basis points to 2.94%. The euro initially strengthened but later retreated.
End of High Inflation in Sight The significant drop in Germany's September inflation is primarily attributed to the waning base effect of the 9-euro ticket discount introduced in 2022, which allowed passengers to use local and regional transportation for a month at a price of 9 euros. Price pressures are receding.
With the decline in inflation, there are also downward risks to the German economy. According to the latest forecasts from five institutions advising the government, Germany's output will contract by 0.6% this year. This projection is more pessimistic than those from the International Monetary Fund and the European Commission. These institutions anticipate that Germany's inflation rate will drop to 2.6% in 2024 and further to 1.9% in 2025.
Furthermore, the decline in inflation in Germany, Europe's largest economy, might hint at a weakening overall Eurozone CPI, set to be announced on Friday. The harmonized CPI for the Eurozone in September is expected to grow year-on-year by 4.5%, slowing down from the 5.2% increase in August. The core harmonized CPI inflation, closely watched by the ECB, is also expected to decrease to 4.8% from 5.3% the previous month.
It's worth noting that the European Central Bank will convene for a monetary policy meeting next month, making the Eurozone's harmonized CPI inflation data crucial for interest rate decisions.
Solidifying End of Rate Hike Cycle Expectations The German inflation data reinforces the prevailing sentiment that the European Central Bank might cease its rate hikes after an unprecedented ten consecutive increases. This is the slowest growth since the surge in energy costs due to the Russia-Ukraine conflict, yet it's still more than double the 2% target set by the ECB for the Eurozone's 20 countries.
However, this doesn't necessarily imply an imminent rate cut. ECB officials have indicated that they will maintain borrowing costs at restrictive levels for an extended period to bring inflation back to target levels.
Jens Nagel, a member of the ECB's Executive Board and the president of the Bundesbank, Germany's central bank, mentioned that the ECB might consider further rate hikes if data suggests it's necessary. The baseline scenario is that the rate hike cycle might conclude with a soft landing for the economy.
