German Inflation Accelerates Again To Highest This Year

(RTTNews) - Germany's consumer price inflation accelerated for a second straight month in September and at a faster than expected pace to reach its highest level in nine months, and the EU measure also followed a similar trend to hit its strongest level since February, adding to the troubles of a sluggish economy and could raise concern for the European Central Bank that hopes to maintain status quo after aggressive policy easing for nearly a year. The consumer price index rose 2.4 percent year-on-year following a 2.2 percent increase in August, preliminary data from the statistical office Destatis showed on Tuesday. Economists had forecast 2.3 percent inflation. Headline inflation was the strongest since December, when it was 2.6 percent.

Inflation, based on the EU measure of harmonized index of consumer prices or HICP, accelerated sharply to 2.4 percent from 2.1 percent in August. That was far ahead of the 2.2 percent price growth economists had forecast. The HICP inflation was the highest since February, when it was 2.6 percent.

Core inflation, which excludes food and energy prices, climbed to 2.8 percent from 2.7 percent.

German inflation has been hovering above the ECB's 2 percent target for almost a year. Persistently strong inflation in the biggest euro area economy could cloud the outlook for the central bank, which left interest rates unchanged for a second time earlier this month, and risks hurting the "good place" feeling for the bank chief Christine Lagarde.

In a speech on Tuesday, the ECB President Lagarde said risks to inflation appear to be well contained. Services inflation was the main driver of overall price growth in September, climbing to 3.4 percent from 3.1 percent logged in each of the previous two months. Goods inflation rose to 1.4 percent from 1.3 percent.

The decline in energy prices sharply moderated to 0.7 percent from 2.4 percent. Food inflation slowed to 2.1 percent from 2.5 percent.

Both the CPI and HICP rose 0.2 percent month-on-month in September, while economists had expected these measures to repeat of the 0.1 percent increase from August.

Commerzbank economist Ralph Solveen said the recent weakening in the rise in labor costs suggests that inflation will ease somewhat, especially in the services sector. That said, factors such as unfavorable demographics and the costs of decarbonization are pushing prices stronger than expected.

"Despite the weak economy in recent years, prices are still rising faster than the ECB would like," Solveen said.

"If, as we expect, the economy picks up in the coming months due to the ECB's interest rate cuts and significantly expansionary fiscal policy, there is a risk that underlying inflation will remain well above the ECB's target," the economist added.

Data released earlier on Tuesday revealed that Germany's unemployment increased more than expected in September as subdued economic activity damped job creation. Separate official data showed that retail sales dropped unexpectedly in August due to a fall in non-food retailing, and import prices declined the most since early 2024 on a sharp decline in energy prices.

"…except for actual inflation data, today's macro data from Germany has a distant taste of deflation risks," ING economist Carsten Brzeski said.

The German inflation data bolsters the case for a high bar to yet another ECB rate cut, the economist noted.

"Besides the slight increase in headline inflation, all other German macro data this morning show that the ECB shouldn't become complacent while enjoying its cosy 'good place'," the economist added.