German inflation drops below 2% for first time since early 2021

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Inflation in Germany has fallen below the European Central Bank’s crucial 2 per cent target for the first time in more than three and a half years, increasing the chances of another rate cut at its next meeting.

Consumer prices in Europe’s largest economy increased by 1.8 per cent in the year to September after rising by 2 per cent a month earlier, according to EU-harmonised data published by German statistical agency Destatis on Monday. Economists polled by Reuters predicted a rate of 1.9 per cent.

Inflation in Germany is now at its lowest level since February 2021, when it stood at 1.6 per cent. It had surged to 11.6 per cent by October 2023, driven by higher energy prices, pent-up demand after the Covid-19 pandemic and shortages in the wake of global supply chain disruptions. The reduction in German inflation follows similar trends in other Eurozone countries, with analysts now expecting the bloc-wide figure to fall below the ECB’s 2 per cent medium-term target when the data is released on Tuesday.

The softer inflation data and a string of weak growth indicators have overturned a long-standing consensus view that the ECB will keep borrowing costs steady in October then make its next cut in December, with a growing number of economists and investors now expecting two rate cuts by year-end.

The German inflation data is “giving ECB doves additional reasons to consider reintroducing the rate cut option at the October meeting”, ING chief economist Carsten Brzeski wrote in a note to clients. Economists at RBC Capital Markets, Goldman Sachs, JPMorgan, BNP Paribas and T Rowe Price in recent days also revised their forecast to say that an October cut was likely.

Eurozone sovereign bond prices were pointing to an 80 per cent probability of a rate cut at the next ECB meeting, sharply up from 40 per cent a week ago, according to Bloomberg.

While headline inflation has fallen within touching distance of the ECB’s target, rate-setters had been concerned by much higher price increases in the services sector and the wider domestic economy.

“Inflation rates below 2 per cent are already feeding concerns over too little price increases,” said Ulrich Kater, chief economist of Frankfurt-based DekaBank, adding that the picture was likely to change again as strong price increases in services were expected to push headline inflation back above the ECB’s target.

Core inflation, which excludes energy and food, stood at 2.7 per cent in Germany in September compared with 2.8 per cent a month earlier, Destatis said. Detailed results will be published on October 11.

Eurostat will publish preliminary September inflation data for the whole currency area on Tuesday, with economists on average expecting a drop to 1.9 per cent from 2.2 per cent in August.

In Italy, the Eurozone’s third-largest economy, consumer prices rose just 0.8 per cent year on year in September, the country’s statistical office said on Monday.

Additional reporting by Philip Stafford in London