Consumer price inflation in Germany saw an unexpected rise in July, with the core inflation rate remaining significantly high, well above the European Central Bank's 2 percent target. This persistence in service sector inflation casts doubt on the possibility of an interest rate cut in September.
According to preliminary figures from the statistical office Destatis, the consumer price index (CPI) climbed by 2.3 percent year-on-year in July, up from 2.2 percent in June. This was contrary to economists' expectations that the rate would remain unchanged. In comparison, the inflation rate in May was 2.4 percent. The harmonized index of consumer prices (HICP) also increased to 2.6 percent from 2.5 percent in June, despite predictions of a slowdown to 2.4 percent.
Core inflation, which excludes volatile items such as food and energy, stayed steady at 2.9 percent in July, maintaining the level it dropped to in June after having exceeded 3 percent since February 2022.
The rate of inflation in services held firm at 3.9 percent for the second consecutive month. In contrast, the growth rate in goods prices modestly rose to 0.9 percent from 0.8 percent. Energy prices continued their downward trend, falling by 1.7 percent compared to the previous year, while food inflation accelerated to 1.3 percent from 1.1 percent.
Month-on-month, the CPI increased by 0.3 percent, while the EU measure of inflation saw a 0.5 percent rise. Economists had predicted hikes of 0.3 percent and 0.2 percent, respectively.
"Given the recent sharp rise in labor costs, the inflation rate for mostly labor-intensive services is likely to stay elevated for the time being," noted Commerzbank economist Ralph Solveen.
Commerzbank projects that core inflation will hover around 3 percent in the coming months, well above the ECB's target.
Data released earlier indicated an unexpected contraction in Germany's economy in the second quarter, primarily due to weak investment, while France and Spain performed better than anticipated, and Italy continued to grow. Germany's gross domestic product (GDP) shrank by 0.1 percent quarter-on-quarter, reversing a 0.2 percent expansion recorded in the first quarter.
"While the German data suggests stagflation, the eurozone as a whole depicts a relatively stable but potentially waning recovery with persistent inflation," said ING economist Carsten Brzeski. "This stickiness in inflation will likely strengthen doubts regarding another rate cut at the September meeting."
ING forecasts that inflation will likely oscillate between 2 percent and 3 percent, rather than decreasing directly to the 2 percent target.
