The state readings released around the same time:
- Bavaria September CPI +2.8% vs +3.2% y/y prior
- Saxony September CPI +2.9% vs +3.3% y/y prior
- North Rhine Westphalia September CPI +2.7% vs +3.3% y/y prior
- Baden Wuerttemberg September CPI +2.6% vs +2.9% y/y prior
After the acceleration in September, headline inflation is seen cooling back a little in German states. While base effects are part of the reason, the re-implementation of specific energy tax reductions and fuel discounts enacted at the start of the month are arguably also playing a part here.
So, that is leading to cooler price pressures overall but still relatively elevated when compared to the months before this.
Putting the estimates together, it offers an indication that German inflation is set to decline at the national level as well. Headline annual inflation is expected to drop to 3.0% in October from 3.3% last month, with the state readings above pointing to a modest likelihood that we might even see a reading below the 3% mark.
In any case, just keep in mind though that the state readings aren’t a perfect proxy for the national figure. There can still be some deviation when the preliminary numbers are released later. However, they have historically been a useful gauge and today’s readings arguably point to some downside risk to the 3.0% consensus, with a national CPI reading around 2.9% now looking quite plausible.
For the ECB, the readings here will just complicate things further as the economic backdrop is reflecting flagging growth conditions amid the risk of price pressures accelerating further. While German inflation may not have jumped in October, there are signs elsewhere that inflation is starting to spread more broadly as seen with France and Spain earlier.
So, that will just keep the pressure on policymakers to act again in December while having to consider if doing too much could risk sending the euro area economy over the edge.
This article was written by Justin Low at investinglive.com.