German Inflation Falls Further Below ECB Target, Raising Chance of October Rate Cut — 2nd Update

By Ed Frankl

German inflation declined further below the European Central Bank's 2% target in September, further raising the chance of a consecutive interest-rate cut at the bank's next meeting in October.

Consumer prices were 1.6% higher than in September last year, down from 1.9% in August, German statistics office Destatis said Monday. It was slightly lower than consensus of 1.7%, from economists polled by The Wall Street Journal.

The German data comes after inflation cooled more rapidly than expected in France and Spain, potentially increasing the pressure on policymakers to vote for an ECB rate cut on Oct. 17, after the central bank cut its key deposit rate to 3.5% earlier in September.

The headline rate of inflation was the lowest since February 2021, ahead of the spiraling inflation prompted by the energy-price spikes after Russia's full-scale invasion of Ukraine, which particularly hurt Germany's energy-intensive industrial sector.

Though much of the pulldown in inflation in September was due to lower energy prices, services inflation--which is closely watched by ECB policymakers as a signifier of underlying trends--also edged down to 3.8% from 3.9% in August. Core inflation, which excludes more changeable energy and food prices, fell to 2.7% in September from 2.8%.

"The latest developments strengthen our confidence that inflation will return to target in a timely manner," ECB President Christine Lagarde said in a statement to the European Parliament on Monday.

In comments that are likely to fuel expectations that the bank will cut rates in October, Lagarde said the ECB will take that increased confidence "into account in our next monetary policy meeting."

Inflation data for the eurozone as a whole is due to be published on Tuesday.

But while the ECB will welcome the fall in underlying inflation, services inflation remains uncomfortably high, according to Capital Economics' chief Europe economist, Andrew Kenningham.

"However, when they meet in mid-October, policymakers will also take into account growing evidence that underlying price pressures and inflation expectations have eased and that activity is slowing or, in Germany's case, contracting," he said.

Germany's economy shrank 0.1% in the second quarter of this year and continues to face a persistent slump in its key manufacturing sector, suggesting an ECB cut could also help spur much-needed activity in Europe's largest economy.

Write to Ed Frankl at edward.frankl@wsj.com

(END) Dow Jones Newswires

September 30, 2024 10:48 ET (14:48 GMT)

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