German inflation falls to two-year low

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German inflation has dropped to its lowest level for two years, boosting hopes that the European Central Bank has reached the end of its rate-rising cycle.

The harmonised index of consumer prices in Germany fell from 6.4 per cent in August to 4.3 per cent in September, the slowest annual price growth in the country since September 2021. Economists polled by Reuters had forecast a rate of 4.5 per cent.

Coupled with lower than expected inflation in Spain, where consumer prices rose 3.2 per cent in September, slowing German price growth added to expectations that the ECB will now leave the eurozone’s benchmark interest rate on hold at 4 per cent for some time.

Inflation across the 20-country bloc is expected to fall from 5.2 per cent in August to almost a two-year low of 4.5 per cent when that figure is released on Friday.

German inflation is expected to continue falling, hitting 3 per cent by the end of the year, according to economists at Dutch bank ING and consultants Pantheon Macroeconomics.

However, soaring oil prices and rapid wage growth are adding to investors’ worries that inflation will remain persistently above the ECB’s 2 per cent target and force it to keep interest rates higher for longer. 

Brent crude jumped nearly 3 per cent on Wednesday to a 10-month high of more than $97 a barrel. German wages rose at a record annual pace of 6.6 per cent in the second quarter, according to official data published last month.

Inflation fell sharply in German transport services and energy in September due to last year’s subsidised €9 monthly travel ticket and fuel discounts dropping out of the annual comparison from this month.

Compared to the previous month, consumer prices rose 0.2 per cent, a slowdown from a monthly pace of 0.4 per cent in August.

After stripping out food and energy, German inflation fell from 5.5 per cent in August to 4.6 per cent. 

Energy inflation in the country fell from 8.3 per cent to 1 per cent, while services inflation dropped from 5.1 per cent to 4 per cent, and food inflation slowed from 9 per cent to 7.5 per cent. Goods inflation came down from 7.1 per cent to 5 per cent.

One worrying sign for central bankers is that consumers’ price expectations over the next 12 months rose for the second consecutive month in the eurozone, according to a monthly Europe Commission survey published on Thursday. But it also found that fewer services and retail companies expected to increase their prices.