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German Inflation Shows Slight Decline in August

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German inflation experienced a slight decline in August, while the core rate remained steady. This confirms previous estimates and raises questions about whether the European Central Bank will raise interest rates next week.

According to data from the German statistics office Destatis, consumer prices in August were 6.1% higher than the same month last year. This is a slight decrease from July’s rate of 6.2%, as per national standards.

The reading aligns with preliminary estimates published by Destatis at the end of August, and it is also consistent with the consensus among economists polled by The Wall Street Journal.

Ruth Brand, president of Destatis, highlighted that “the inflation rate therefore remains at a high level. The increases in energy and food prices exceed overall inflation and keep the inflation rate high.”

When considering the EU-harmonized basis, the inflation rate stands at 6.4% in August. This indicates that it remains significantly above the European Central Bank’s target of 2%. As a result, the bank could potentially raise its key rate from the current 3.75% next week.

However, there are differing opinions among the decision-making committee members. Some, known as doves, favor lower interest rates. They argue that surveys and industrial data demonstrate a slowdown in the economy, caused by decreased demand and reduced spending resulting from higher rates.

Recent data reveals that German industrial production in July decreased by 0.8% month-on-month. Additionally, new factory orders plunged by 11.7%. These figures align with the assessment made by the IfW Kiel Institute for the World Economy, which predicts a more significant contraction of 0.5% in Germany’s economy in 2023 than previously anticipated.

Inflation in Germany: A Closer Look

The latest data on inflation in Germany reveals some interesting trends. According to Destatis, the elevated inflation reading for August can be largely attributed to energy-price inflation, which saw a significant rebound from 5.7% in July to 8.3% in August. One factor contributing to this increase is the base effect stemming from government assistance for energy bills provided last year. Notably, electricity prices experienced a particularly rapid acceleration.

However, there is a silver lining when it comes to food inflation, which has been a major driver of rising consumer prices in recent months. The data shows that food inflation actually cooled down in August, dropping from 11.0% in the prior month to 9.0%.

When it comes to core inflation, a measure that excludes the volatility of food and energy prices and is closely monitored by ECB policy makers, there was no change in August. It remained at 5.5%, the same as July.

Furthermore, another base effect from last year’s nine-euro rail discount program boosted services inflation in August. It’s important to note, however, that this effect will cease to apply from September onwards. As a result, analysts predict that the core rate will likely decrease in September. This could have implications for monetary policy tightening decisions to be made at the upcoming ECB meeting.

Looking ahead, economists expect headline inflation to continue declining towards the end of the year. Both the Ifo Institute and the Kiel-based IfW institute project German inflation to average at 6.0% in 2023 before experiencing further decreases in 2024. However, they caution that the core rate may remain higher due to wage costs in the labor-intensive services industry remaining elevated.

Overall, these developments shed light on the various factors influencing inflation in Germany. As we await the ECB meeting, all eyes are on how policymakers will navigate these dynamics.

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