German Inflation Slows More Than Expected

(RTTNews) - Germany's consumer price inflation slowed faster than expected in June amid a steeper year-on-year decline in energy prices and the core figure eased to its lowest in about two-and-a-half years, while services inflation proved sticky for another month, suggesting it is not yet time for policymakers at the European Central Bank to drop their guard.

The consumer price index rose 2.2 percent year-on-year following a 2.4 percent increase in May, preliminary data from the statistical office Destatis showed Monday. Economists had expected the rate to slow to 2.3 percent.

Headline inflation slowed for the first time in three months. Inflation, based on the harmonized index of consumer prices, slowed to 2.5 percent from 2.8 percent in May. Economists had forecast a rate of 2.6 percent.

Core inflation, which excludes food and energy prices, eased to 2.9 percent from 3.0 percent. The core inflation rate moved below 3 percent for the first time since February 2022 and was the lowest since that month when it was 2.8 percent.

"The overall inflation rate may fall temporarily to 2 percent in the coming months due to lower energy prices," Commerzbank economist Ralph Solveen said.

"However, the core inflation rate is likely to stabilize well above the ECB's target value, showing that the inflation problem has not yet been solved."

Services inflation remained steady at 3.9 percent, while the rate of increase in prices of goods slowed to 0.8 percent from 1.0 percent. Services being a usually very labor-intensive sector, rising wage costs are having a much greater impact, Solveen said. Commerzbank expects the inflation rate for services to remain close to its current level for the time being.

Energy prices dropped 2.1 percent following a 1.1 percent fall in the previous month. Food prices rose for a third straight month and the rate of inflation accelerated to 1.1 percent from 0.6 percent. Consumer prices edged up 0.1 percent from the previous month, when they rose at a similar pace. Economists had forecast a 0.2 percent gain.

The EU measure of inflation - HICP, rose 0.2 percent for the second month in a row.

"Looking ahead, the stickiness of inflation at slightly too high a level looks set to continue as favorable energy base effects are petering out while, at the same time, wages are increasing," ING economist Carsten Brzeski said.

"For now, today's German inflation numbers leave the door open to another rate cut in September, even though wage developments could still motivate some officials to postpone the next rate cut to the winter," the economist added.

The ECB lowered interest rates by 25 basis points in June, taking the refi rate to 4.25 percent. This was the first reduction since 2019.

Economists expect one more ECB rate cut this year.