German inflation falls to lowest level since start of Ukraine war

BERLIN (Reuters) -German inflation fell in September to its lowest level since Russia launched its full-scale invasion of Ukraine, signalling what could be the beginning of the end for the high inflation that has weighed heavily on Europe’s largest economy.

German consumer prices, harmonised to compare with other European Union countries, rose by an annual 4.3% in September, preliminary data from the federal statistics office showed on Thursday.

Analysts polled by Reuters had forecast it slowing to 4.5% from 6.4% year-on-year in August.

Germany’s core inflation rate, which excludes volatile items such as food and energy, fell to 4.6% year-on-year from 5.5% in August.

Food prices continued to show above-average growth, posting a 7.5% year-on-year increase. However, energy prices were only 1.0% higher on the year.

The end of temporary government energy relief measures and the cheapest public transportation offers added to upward price pressure in September 2022, setting a higher base for this month’s annual comparison.

“About 1 percentage point of the decline in inflation is due to the fact that the 9-euro ticket and the fuel discount expired in September last year,” said Ralph Solveen, said Ralph Solveen, senior economist at Commerzbank.

But even without this base effect, he said the inflation trend was still pointing downwards because the waves of inflation in energy, food and industrial goods are easing.

Meanwhile, five economic institutes predict Germany’s economy will shrink by 0.6% this year, as rising interest rates take their toll on investment and still high inflation depresses consumption. They forecast inflation at 6.1% this year, slowing to 2.6% next year and 1.9% in 2025.

The ECB is keeping a close eye on euro zone inflation data, with September’s reading due to be published on Friday. Spain earlier reported a 3.2% harmonised inflation rate for September.

Economists polled by Reuters expect the inflation rate across the 20 countries that use the euro to fall to 4.5% in September from 5.2% in August.

“At face value, today’s macro data in the euro zone has made the call for a pause at the European Central Bank’s October meeting even stronger,” ING’s Carsten Brzeski said, arguing that confidence continues to weaken and inflation has come down.

However, he ruled out that a pause in October would necessarily mark the end of the current hiking cycle.

“Given the ECB’s concern about its inflation-fighting credibility, the fear of a de-anchoring of inflation expectations and the ECB’s very own dismal track record in predicting inflation, the risk of further rate hikes remains high,” Brzeski said.

(Reporting by Maria Martinez, Miranda Murray and Friederike Heine; Editing by Kirsten Donovan and Alison Williams)