By By Maria Martinez
BERLIN (Reuters) – German inflation fell more than expected in August, declining to its lowest level in more than three years and making it easier for the European Central Bank to cut interest rates in September.
Inflation eased to 2.0% in August, its lowest level since June 2021, thanks to lower energy prices, preliminary data from the federal statistics office showed on Thursday.
Analysts polled by Reuters had forecast a reading of 2.3% in August, after a year-on-year increase in consumer prices of 2.6% in July, based on data harmonised to compare with other European Union countries.
“People have more money in their wallets again,” German Chancellor Olaf Scholz said on Thursday on social media platform X, noting that inflation was falling and real wages were rising for the fifth quarter in a row. “That’s good, we’ll stay tuned!” Scholz said.
The German data comes ahead of the euro zone inflation release on Friday.
Inflation in the bloc is expected at 2.2% in August, down from 2.6% in the previous month, according to economists polled by Reuters.
“The just-released flash estimate of German inflation in August has everything the European Central Bank needs to continue cutting rates at the September meeting,” said Carsten Brzeski, global head of macro at ING. The inflation report shows the first signs of a broader disinflationary trend, which goes beyond energy prices, Brzeski said.
Markets have now fully priced in an interest rate cut from the ECB at its next policy meeting next month and at least one more move later this year.
In August, energy prices in Germany fell by 5.1% compared to the same month last year.
The German economy shrank by 0.1% in the second quarter of 2024 compared with the previous three-month period, spurring recession fears. A technical recession is defined as two consecutive quarters of negative growth.
“Fading inflationary pressure combined with fading growth momentum offer an almost perfect macro backdrop for another rate cut,” Brzeski said.
Core inflation, which excludes volatile food and energy prices, was at 2.8% in August from 2.9% in the previous month.
“That paves the way for a September rate cut, but with services inflation still sticky, the easing cycle will be gradual,” said Franziska Palmas, senior Europe economist at Capital Economics. The economic think tank forecasts the central bank will cut rates only once every quarter, until the deposit rate reaches 2.5%.
Economists expect a bumpy ride ahead for inflation.
“From now on things are unfortunately on the up again,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, adding that the inflation rate is likely to move back towards 3% in the next six to 12 months.