Inflation in Germany fell to 1.9% in August 2024, the lowest level since March 2021, increasing expectations of ECB rate cuts. Euro and Bund yields fell, while the DAX index hit record highs.
ADVERTISINGInflation fears are finally fading in Europe’s largest economy, increasing the likelihood of an imminent interest rate cut by the European Central Bank.
According to preliminary data from the Federal Statistical Office released on Thursday, Germany’s annual inflation rate fell to 1.9% in August 2024 compared to a year earlier. This is down from 2.3% in July and is below economists’ expectations of 2.1%, which is a welcome downward move.
The inflation figure for Germany in August also marks the lowest annual increase in the consumer price index since March 2021. On a monthly basis, the index shrank by 0.1%, the first decline since November 2023.
Inflation expectations in Germany fall, energy prices fall
Looking more closely at the data, energy prices fell 5.1% year-on-year, while goods inflation fell from 0.9% to 0%. However, services inflation remained at 3.9% for the fourth month in a row.
Core inflation, which excludes volatile items such as energy and food, fell to 2.8% year-on-year from 2.9%, reaching its lowest level since February 2022.
The Harmonized Consumer Price Index, which is used to assess overall inflation in the euro area, fell to 2 percent year-on-year in August from 2.6 percent, also below the forecast of 2.3 percent.
This is the lowest annual price growth for harmonized goods and services in Germany since March 2021. On a monthly basis, the harmonized index shrank by 0.2%, corresponding to a similar decline observed in January 2024.
Earlier, Spain also reported an unexpected decline in headline inflation on Thursday.
The increase in Spain’s national consumer basket slowed to 2.2% in August 2024, the lowest since June 2023. This represents a decline from 2.8% in July and is below market expectations of 2.4%. Core consumer price index inflation in Spain also declined by a tenth of a percentage point, coming in at 2.7% year-on-year.
The report by Spain’s National Statistics Institute highlighted falling fuel prices as the main cause, although food and soft drinks also contributed to the downward trend.
Market reactions
The euro fell 0.4 percent against the dollar to just under $1.11, extending its morning losses following the release of US GDP data.
The common currency had already begun to weaken following the publication of Spanish data and reports from several German federal states in anticipation of lower-than-expected inflation in Germany.
The yield on 10-year German government bonds fell by two basis points to 2.25 percent, while the yield on 2-year government bonds fell by five basis points to 2.34 percent, reflecting increasing market expectations of an interest rate cut by the European Central Bank.
The German stock index DAX maintained its gains, rising 0.7% after hitting new all-time highs earlier in the day. Top performers included Bayer, Sartorius and Rheinmetall, which rose 2.4%, 2.2% and 2.1% respectively.
Other European indices followed the upward momentum of the DAX. The Euro Stoxx 50, an important benchmark for the European markets, rose by 0.8 percent.
