German inflation falls to lowest levels since start of Ukraine war

Germany's inflation rate looked set to decrease to 4.5% in September, marking the lowest level seen since the onset of the war in Ukraine, according to provisional figures from the country’s federal statistical office on Thursday.

The rate reflected a decrease from August, when it peaked at 6.1%, with the decline bringing the rate closer to February 2022's level of 4.3%.

Destatis said it expected a month-on-month increase of 0.3% in consumer prices for September, and when excluding volatile commodities like food and energy, core inflation was projected to be 4.6%, down from 5.5% in the prior month.

Factors behind the rate included a surge in food prices, which saw above-average growth of 7.5% year-on-year, while energy prices only rose 1% - a stark difference from the overall index's yearly change.

That disparity was traced back to base effects from September last year, notably influenced by the end of the Federal fuel discount.

Similarly, the end of the promotional nine-euro rail ticket, available from June to August, impacted prices in the service sector, registering a 4.0% increase year-on-year.

“This likely is the beginning of a sustained, and accelerated, decline in German core inflation,” said Claus Vistesen, senior eurozone economist at Pantheon Macroeconomics.

“We see both the national and core rate fall by 150 basis points between now and the end of the year, extending the fall into 2024.

“Bond markets, however, are in no mood to celebrate.”

Vistesen noted that 10-year bund yields were eyeing 3.0%, likely due to the inflationary threat from a sustained rebound in oil prices.

“News of relatively wide fiscal deficits in France and Italy next year also probably are playing a role, but we think it is premature to say whether any of the preliminary budget plans currently being discussed in the media and markets will actually become reality.

“We have long had bear steepening in our bond market forecasts, as inflation risks re-surfaced, but not until the second half of 2024.

“It will be interesting to see how this plays out; our and market forecasts for rate cuts next year are now certainly put on notice.”

Reporting by Josh White for Sharecast.com.