German Inflation Accelerates Unexpectedly, Casts Doubt On ECB Rate Cut In September

(RTTNews) - Consumer price inflation in Germany unexpectedly increased in July and the core figure remained stubbornly high as well as way above the European Central Bank's 2 percent target amid the persistence of sticky services inflation and cast doubts on the chances of an interest rate cut in September.

The consumer price index rose 2.3 percent year-on-year following a 2.2 percent increase in June, preliminary figures from the statistical office Destatis showed Tuesday.

Economists had expected the inflation rate to remain unchanged. In May, the rate was 2.4 percent. Inflation, based on the harmonized index of consumer prices, climbed to 2.6 percent from 2.5 percent in June. Economists had expected the rate to slow to 2.4 percent.

Core inflation, which excludes food and energy prices, was unchanged at 2.9 percent in July, after moving below 3 percent for the first time since February 2022 in June.

Services inflation remained steady at 3.9 percent for the second straight month, The rate of growth in goods prices modestly rose to 0.9 percent from 0.8 percent.

Energy prices continued to fall, down 1.7 percent from a year ago, while food inflation accelerated to 1.3 percent from 1.1 percent.

The CPI rose 0.3 percent from the previous month and the EU measure of inflation increased 0.5 percent. Economists were looking for increases of 0.3 percent and 0.2 percent, respectively.

"In view of the recent sharp rise in labor costs, the inflation rate for mostly labor-intensive services is likely to remain high for the time being," Commerzbank economist Ralph Solveen said.

Commerzbank expects the core inflation rate to remain at around 3 percent in the coming months, well above the ECB's 2 percent target.

Official data released earlier on Tuesday showed that Germany's economy contracted unexpectedly in the second quarter largely due to weak investment, while France and Spain fared better than expected and Italy kept growing.

Gross domestic product shrank 0.1 percent on a quarterly basis in the second quarter, reversing the first quarter's 0.2 percent expansion.

"While German data is stagflationary, the eurozone as a whole provides a picture of a relatively solid but potentially fading recovery with sticky inflation," ING economist Carsten Brzeski said. "It is this stickiness of inflation that will strengthen the doubts around another rate cut at the September meeting."

ING expects inflation to hover within the broader range of between 2 percent and 3 percent rather than returning in a straight line to 2 percent.