Germany’s inflation fell more than expected in June, resuming its downward trend after two consecutive months of increases. This leaves the door open for another rate cut by the European Central Bank in September.
Preliminary data from the federal statistics office showed that inflation eased to 2.5 percent in June, down from 2.8 percent in May and below the 2.6 percent forecast by analysts.
Reversed base effect contributes to decline
ING’s global head of macro Carsten Brzeski attributed this to the reversed base effect from last year’s introduction of cheap public transportation in May. Inflation in Europe’s largest economy had already slackened to 2.3 percent in March, its lowest level since June 2021.
Energy prices and core inflation
The drop in June was mainly driven by a fall in energy prices, while core inflation, which excludes volatile food and energy prices, fell to 2.9 percent from 3.0 percent in May. Commerzbank economist Ralph Solveen noted that goods inflation fell to 0.8 percent in June from 1.0 percent in May, but warned that this downward trend should soon come to an end.
Fewer companies intend to raise prices
According to a survey by the Ifo institute for Economic Research, fewer companies in Germany intend to raise their prices than in the previous month. Timo Wollmershaeuser, head of forecasts at Ifo, said the inflation rate is likely to continue its slow decline and fall below the 2 percent mark in August for the first time since March 2021.
Read more: Inflation in Germany eases to 2.2 percent in March, lowest since June 2021
Potential for rate cut in September
Pantheon Macroeconomics also sees Germany’s headline inflation falling below 2 percent by August, “helping to get a 25 basis points rate cut over the line in September, before a rebound to just under 2.5 percent by the end of the year,” chief eurozone economist Claus Vistesen said.
Cautious outlook from ECB policymakers
However, services inflation in Germany remained unchanged at 3.9 percent in June, which could keep ECB policymakers cautious, according to Franziska Palmas, senior Europe economist at Capital Economics. ING’s Brzeski said the latest German inflation numbers leave the door open to another rate cut in September, though wage developments could still motivate some officials to postpone the next rate cut to the winter.
For more economy news, click here.
