Germany’s inflation rate dropped to 1.9% in August 2024, the lowest since March 2021, boosting expectations of ECB rate cuts. The euro and Bund yields fell, while the DAX index hit record highs.
Inflation fears are finally disappearing in Europe’s largest economy, increasing the likelihood of imminent interest rate cuts by the European Central Bank.
Germany’s annual inflation rate plummeted to 1.9% year-on-year in August 2024, according to flash data from the Federal Statistical Office released on Thursday. This marks a decline from 2.3% in July and falls short of economists’ expectations of 2.1%, providing a welcoming downside.
The August inflation reading for Germany also marks the lowest annual increase in the consumer price index since March 2021. On a monthly basis, the index contracted by 0.1%, the first decline since November 2023.
German inflation falls expectations, as energy prices plummet
Breaking down the data, energy prices contracted by 5.1% on an annual basis, while goods inflation dropped from 0.9% to 0%. However, services inflation remained sticky at 3.9% for the fourth consecutive month.
Core inflation, which excludes volatile items such as energy and food, declined from 2.9% to 2.8% year-on-year, its lowest level since February 2022.
The harmonised index of consumer prices, which is used for assessing overall inflation across the eurozone, dropped from 2.6% year-on-year to 2% in August, also falling below the forecast of 2.3%.
This marks the slowest annual price growth for harmonised goods and services in Germany since March 2021. On a monthly basis, the harmonised index contracted by 0.2%, mirroring a similar decline observed in January 2024.
Earlier on Thursday, Spain also reported an unexpected drop in headline inflation.
The increase in Spain’s national consumer basket slowed to 2.2% in August 2024, the lowest since June 2023. This represents a decline from 2.8% in July and falls below market expectations of 2.4%. Core CPI inflation in Spain also decreased by one-tenth of a percentage point, landing at 2.7% year-on-year.
The report from Spain’s National Statistics Institute highlighted falling fuel prices as the primary factor, with food and non-alcoholic beverages also contributing to the downward trend.
Market reactions
The euro fell by 0.4% to just below $1.11 against the dollar, extending its morning losses after the release of U.S. GDP data.
The single currency had already started to weaken in anticipation of lower-than-expected German inflation, following the release of Spain’s data and reports from various German states.
The 10-year Bund yield dropped by 2 basis points to 2.25%, while the yield on the 2-year Schatz fell by 5 basis points to 2.34%, reflecting growing market expectations of an interest rate cut by the European Central Bank.
The German DAX index maintained its session gains, up 0.7%, after reaching fresh all-time highs earlier in the day. Among the top performers were Bayer, Sartorius, and Rheinmetall, which gained 2.4%, 2.2%, and 2.1%, respectively.
Other European indices followed the DAX’s upward momentum. The Euro Stoxx 50, a key benchmark for European markets, rose by 0.8%.
