The August inflation was accompanied by positive news in Germany. With an interannual rate of 1.9%, compared to 2.3% in JulyThe German country’s consumer price index (CPI) is now at lowest level since March 2021according to data released this Thursday by the official federal statistics agency, Destatis. In the same vein, the harmonised CPI for calculating the global figure for the eurozone stood at 2% year-on-year, compared to 2.6% in July. On an even more positive note, the monthly decline of 0.1% is the first monthly decline in August since 2020. Although the decline was less notable in the case of core inflation (excluding energy and food), which fell by only a tenth to 2.8% year-on-year, this set of data, together with those also released this Thursday in Spain – the CPI fell to 2.2% -, end up supporting a further cut in interest rates by the European Central Bank (ECB) at its September meeting, even if they have not yet resolved the path to follow.
The fall in German inflation in August was the result of the falling energy prices and the favorable base effectsas well as the falling commodity prices. Taking into account the available regional data, inflation in services it remains close to 4% over a year. While hotel and restaurant prices have increased somewhat, leisure spending and clothing price inflation have declined. Monthly changes show a real decline in food and beverage prices, as well as household and transport items.
“The preliminary estimate of German inflation in August, which has just been published, has everything the ECB needs to continue to cut rates at September meeting“, points out Carsten Brzeski, economist at ING, in a brief comment after the data. For the expert, at first glance, this inflation report is excellent news for the ECB, because it finally shows the first signs of a broader disinflationary policy trend, which goes beyond energy prices.
At the same time, he acknowledges, it is too early to give the green light to inflation, either in Germany or in the eurozone as a whole. “The salary data “This morning’s news is one of the reasons for concern. German real wages have risen for the fifth consecutive quarter, which could fuel inflationary pressures going forward. In addition, we should not forget that German trade unions are approaching the post-summer negotiations with high demands. It may take longer than the ECB expects before wage growth in the eurozone slows down significantly,” Brzeski said.
In any case, if tomorrow’s eurozone inflation data confirms this, the German figures should make the ECB’s decision to continue lowering interest rates a little easier, the ING economist continues. “The weakening of inflationary pressures, together with the loss of growth momentum, provide an almost perfect macroeconomic context for a rate cut,” he points out.
“Inflation figures from Germany and Spain suggest that Eurozone headline inflation may have fallen to 2% target “The ECB’s rate cut in August and the underlying rate has declined. This paves the way for a rate cut in September, but with services inflation remaining stagnant, the easing cycle will be gradual,” Franziska Palmas, senior economist at Capital Economics, wrote in a note to clients.
Stubborn inflation in services
For Palmas, national data from Germany and Spain suggest that inflation in the eurozone will be around 2%, slightly below the consensus forecast of 2.2%, but with the services inflation could be stuck around 4% for the tenth consecutive month. “This will be enough for the ECB to cut rates in September. But we still expect the Bank to cut rates only once a quarter, until the deposit rate reaches 2.5%,” he risks.
From Commerzbank, its economist Ralph Solveen extracts some optimism: “This decline in Germany is largely due to the significant drop in energy prices. The core inflation rate, excluding food and energy prices, was also lower than in the previous month, but at 2.8% it remains well above 2%. This suggests that the inflation rate will only remain below this level for a short period.
“As wages are expected to continue to rise sharply, it is likely that Service prices continue to rise sharply. Since price increases in the preliminary phases (i.e. producer prices of intermediate and consumer goods, as well as import prices) indicate that the goods inflation rate will soon reach its lowest point, we assume that the core inflation rate will barely decrease in the coming months and will even tend to increase slightly towards the end of the year,” Solveen continues.
“Given the significant decline in energy prices in the last months of last year, the year-on-year energy inflation rate is also expected to increase again from October. to halt the fall in the inflation rate below 2%“, says the German economist.
Ahead of this Friday, when the Eurozone data will be known, Focus on data from France. “In August 2024, French inflation is expected to fall below 2% over one year for the first time in three years (August 2021). This disinflation is mainly linked to energy prices and should continue to increase in early 2025 for the same reasons (expected drop in electricity prices). On the other hand, inflation in services, which was mainly affected by the Olympic effect, is expected to remain high in the short term, but this will not prevent further disinflation,” Stéphane Colliac, economist at BNP Paribas, writes in a note to clients.
