ECB rate-cut expectations rise as German inflation hits three-year low
German inflation dropped its lowest level in more than three years this month, unexpectedly falling below the 2% target set by the European Central Bank.
According to the Federal Statistical Office, the annual growth rate of consumer prices slowed to just 1.9% in August, down from 2.3% in July. This was the lowest level recorded since March 2021, and well below the 2.1% expected by economists.
Services inflation held steady at 3.9%, but prices for goods were unchanged on last year, slowing from 0.9% growth in July. Within the headline goods measure, food inflation picked up to 1.5% from 1.3%, but energy prices dropped 5.1% year-on-year, much steeper than the 1.7% annual decline in July.
Spanish inflation data on Thursday also came in lower than forecasts, easing to just 2.2% from 2.8% – its lowest level since June 2023.
The downside surprise for both countries is likely to prompt the ECB cut interest rates again in September, according to analysts.
"Today's data point to renewed momentum in the cooling of inflation, but also send further warnings about the outlook for the economy and labour markets," said Paolo Grignani, senior economist at Oxford Economics.
"Spanish and German regional inflation fell more than expected, raising the risk of a downside surprise in tomorrow's eurozone flash estimate and making a rate cut at the next ECB meeting all but certain."