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In a significant development, German inflation slowed more than expected, hitting a low not seen since June 2021, with a rate of 3%. Economists had anticipated a moderation to 3.3%. This decline in price pressures reaffirms the European Central Bank’s (ECB) stance that its record bout of interest rate increases is starting to have an impact.
Europe’s Economic Woes Continue
Similar declines are also anticipated in Italy and, to a lesser extent, in France and across the 20-nation eurozone. Spanish figures released earlier indicated a slight uptick in inflation attributed to rising electricity costs.
Forecast for November
Bloomberg Economics’ Nowcast predicts another deceleration in inflation, projecting a rate of 2.8% for November.
ECB Vice President Luis de Guindos expressed concerns about the euro area economy, stating, “Recent indicators point to continued weakness in the near term.”
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ECB’s Decision and President’s Comments
ECB President Christine Lagarde mentioned the expectation of further easing in inflation as a key factor behind the recent pause in rate hikes. This pause followed ten consecutive rate increases. She noted that these increases have been “forcefully” influencing financing conditions, reducing demand and helping the ECB work toward its 2% inflation goal.
Effect of German Inflation
The impact of these changes is already evident in Germany. In the third quarter, the economy contracted by 0.1%, which was less than anticipated. The primary factor behind this contraction was a decrease in household spending.
Positive Signs in Equipment Investment
However, there was an increase in equipment investment, and some economists suspect that military spending might be a contributing factor.
Challenges for Businesses
Most companies are grappling with the aftermath of the energy-induced downturn experienced last winter. Higher borrowing costs and weak export demand have hindered their recovery. Lanxess AG, a chemical giant, has announced plans to cut 7% of its workforce this month. Volkswagen AG is also doubling down on cost-saving measures to enhance profitability.
Bundesbank’s Expectations
The Bundesbank had already flagged the third-quarter contraction in its latest monthly report. It also anticipates a further slowdown in headline German Inflation in the coming months. However, the core inflation rate, which excludes energy and food, may remain above 4% in the near future due to pressures in the services sector.
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