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Let’s dive into the latest data on inflation in Germany for July. Energy prices fell by 1.7% year-on-year, showing a slight improvement from the 2.1% decline in June. On the other hand, food prices increased by 1.3% year-on-year, up from 1.1% in June. When excluding food and energy, the annual inflation rate stood at 2.9%. Goods prices rose by 0.9% year-on-year, while consumer goods prices increased by 1.1%. Services prices were up 3.9% year-on-year, with net rents rising by 2.2%.
What do these numbers mean for the German economy and potential ECB rate decisions? The inflation numbers for July challenge investor expectations of multiple 2024 ECB rate cuts. Services sector inflation is significantly above the ECB’s 2% target, while German goods prices highlight the weak demand environment impacting Germany’s manufacturing sector. Despite the rising risk of a German economic recession, it is unlikely to pressure the ECB into cutting interest rates. Services prices may need to soften sharply to increase investor bets on multiple 2024 ECB rate cuts.
Federal Statistical Office (Destatis) President Ruth Brand noted that the price declines for energy are dampening the inflation rate, while above-average price increases for services continue to be observed. Pictet Wealth Management Head of Macroeconomic Research Frederik Ducrozet highlighted the upward revision to 2025 inflation projections, driven mainly by Germany, the Netherlands, and Belgium.
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