German Inflation Sinks to Level Last Seen Before War in Ukraine

German inflation plunged to its lowest level in two years after the effect of heavily discounted public transport last summer disappeared from the comparison.

(Bloomberg) — German inflation plunged to its lowest level in two years after the effect of heavily discounted public transport last summer disappeared from the comparison.

Consumer prices advanced 4.3% from a year ago in September, compared with 6.4% in August, the statistics office said Thursday.

While that’s the slowest pace since Russia’s invasion of Ukraine sent energy costs soaring, it remains more than double the European Central Bank’s 2% goal for the 20-nation euro zone. Prices rose 0.2% on the month.

The data from Europe’s largest economy will cement expectations for the ECB, barring any shocks, to stop raising interest rates following an unprecedented 10 straight hikes. That doesn’t mean a cut is imminent: Officials say they’ll keep borrowing costs at restrictive levels for a prolonged period to get price gains back to the target.

German bonds pared declines and the euro trimmed gains after the release, as markets increasingly come around to that higher-for-longer narrative. The yield on 10-year government debt is hovering just below 3% — the highest since 2011. The euro is flirting with its weakest level against the dollar this year, near $1.05.

Money markets are wagering on two quarter-point rate reductions by end-2024, compared with as many as three just two weeks ago.

Inflation not only remains elevated but is accelerating in some countries. Earlier Thursday, Spain reported a jump to 3.2% this month on electricity and fuel costs. Citing the advance in oil that’s brought prices near $100 a barrel, its central bank sees a further acceleration to 4.3% in 2024. In Ireland, price growth quickened to 5% from 4.9%.

Commodities are among upside risks to the ECB’s prediction that euro-area inflation will return to 2% in the second half of 2025. A separate report from the European Commission showed consumer-inflation expectations at their highest since May.

What Bloomberg Economics Says…

“German HICP inflation plunged in Septembe as base effects and statistical distortions that had pushed the measure up through the summer started to unwind. This helped reveal a picture of declining underlying pressures. We expect this trend to persist in the coming months, offering policymakers at the ECB some reassurance over the medium-term inflation outlook.” 

—Maeva Cousin, senior euro-area economist. Click here for full REACT 

There are downside risks, too, as the region’s economy sours. German output will shrink by 0.6% this year, according to new forecasts by five institutes that advise the government — a gloomier take than the International Monetary Fund and the European Commission. The institutes see this year’s 6.1% inflation reading easing to 2.6% in 2024 and 1.9% in 2025.

September’s German data show price pressures are abating, even if the size of the retreat is boosted by the base effect of the government offering unlimited local and regional transport for €9 ($9.48) a month between June and August 2022.

Bloomberg Economics’ nowcast suggests that another deceleration in inflation to 3.2% is due for October. 

Bundesbank President Joachim Nagel has warned against sounding the all clear, saying further rate increases may yet be needed. September figures for the euro-area, due Friday, are expected to reveal a drop to 4.5% from 5.2% — the lowest since late-2021.

“We have done a lot by implementing 10 hikes so far,” Nagel told Central Banking in a Sept. 18. interview that was published Thursday. “Maybe more will be on the way if the data indicate that further action is warranted.”

–With assistance from Joel Rinneby, Constantine Courcoulas, Alexander Weber and Andrej Sokol (Economist).

(Updates with Bloomberg Economics, Bloomberg nowcast and Bundesbank president.)

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