Germany CPI inflation falls to 4.5% in September vs. 4.6% expected

Inflation in Germany, as measured by the change in the Consumer Price Index (CPI), declined to 4.5% on a yearly basis in September from 6.1% in August, Destatis' flash estimate showed on Thursday. This reading came in below the market expectation of 4.6%. On a monthly basis, the CPI rose 0.3%, matching the market expectation and August's increase.

The annual Harmonised Index of Consumer Prices (HICP), the European Central Bank's (ECB) preferred gauge of inflation, dropped sharply to 4.3% from 6.4% in the same period. 

Market reaction to German inflation report

The Euro preserved its strength despite the softer-than-forecast Greman inflation readings. As of writing, the EUR/USD pair was up 0.4% on the day at 1.0540. 

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This section below was published as a preview of the German inflation report at 08:30 GMT.

• The Federal Statistical Office of Germany will publish the German inflation data on Thursday.
• Headline CPI is set to rise 4.6% YoY in September, down sharply from a prior increase of 6.1%.
• German inflation data to offer fresh hints on the Eurozone figures, impacting the ECB’s policy.

Interest rates will stay high ‘as long as necessary’, European Central Bank (ECB) President Christine Lagarde told the European Parliament’s committee on economic and monetary affairs on Monday. Does this mean an end to the ECB rate hike cycle or the door is still left ajar for one more rate hike this year?

The ECB meets next month for its monetary policy review, and therefore, the upcoming Harmonized Index of Consumer Prices (HICP) inflation data from Germany and the Eurozone hold utmost significance for its impact on the central bank’s policy decision.

The Euro (EUR) is poised to extend its downtrend if the inflation data from the Eurozone economies, especially Germany, highlights the underlying disinflationary trend.

What to expect in the next German inflation report?

The official data will be released by the Federal Statistical Office of Germany (Destatis) on Thursday. The annual German Consumer Price Index (CPI) is expected to rise 4.6% in September, down from a 6.1% increase reported in August. The monthly CPI inflation is set to increase at a steady rate of 0.3% in the reported period.

Germany’s annual HICP inflation is seen dropping sharply to 4.5% in September from 6.4% in August. The core HICP is likely to rise 0.3% in September, compared with a 0.4% acceleration in August.

Further cooldown in inflation in Europe’s largest economy is likely to hint at softer inflation readings in the bloc’s overall inflation data, which will be published on Friday.

The headline Eurozone Harmonized Index of Consumer Prices is expected to rise 4.5% YoY in September, a slowdown from August’s 5.2% increase. The Core HICP inflation, the gauge closely watched by the European Central Bank, is also seen lower at 4.8% in the said period as against a 5.3% increase seen in the previous month.

Commenting on inflation developments, Lagarde said that price growth is likely to remain "too high for too long" despite the recent decline. “Strong spending on holidays and travel and increasing wages were slowing the decline in price levels even as the economy stays sluggish”, she added. Therefore, it remains to be seen if the German and Eurozone inflation data underscore the hidden disinflationary signals or point to a renewed uptrend in inflation in the face of the recent surge in Oil prices.

The regional inflation data point could hint at the trend in German headline inflation in September. North Rhine-Westphalia (NRW) is the first German state to report September inflation readings and, as it is the most populous state, the reading can often be a signal of the trend in the figure for the whole of Germany.

Still, North-Rhine Westfalia figures don’t always work well as a forward-looking indicator. In August, inflation in this German state rose to 5.9% on year, up from 5.8% in July, signaling the possibility of an unexpected rise in overall  German inflation. However, the nationwide figures eventually showed softer inflation figures as some other major states saw easing price pressures. For example, consumer prices in the German State of Bavaria rose by 5.9% YoY in August, the lowest inflation rate since February 2022 and easing from a 6.1% increase in the previous month. The annual inflation rate in the German state of Saxony ticked up to 6.8% in August 2023, from 6.7% in July. 

For September, consumer prices in the German state of NRW rose by 0.2 % over the month in September and were up by 4.2 % YoY, the state's statistics office said on Thursday.

Previewing the August inflation data, Deutsche Bank explains: “September preview: Headline and core inflation prints might drop substantially. Owing to the petering out of two larger base effects – stemming from last summer's fuel discount and 9-Euro-ticket, we anticipate Germany's CPI headline and core inflation rates to fall more substantially again in September.”

“In this context, we gauge that the above-mentioned two effects could have boosted the year-over-year prints between June and August in the order of up to ¾ pp,” analysts at Deutsche Bank noted.

As usual, Spain has already published its national inflation figures for August, providing clues about the direction of the whole Eurozone HICP data.

Spain's Consumer Price Index (CPI) rose 3.5% YoY in September, preliminary data from the National Statistics Institute (INE) showed on Thursday. The 12-month inflation was higher than the 2.6% rate in August and in line with the 3.5% expected.

When will the HICP inflation report be released and how could it affect EUR/USD?

Germany's preliminary HICP is due at 12:00 GMT. In the lead-up to the Eurozone inflation showdown, the Euro (EUR) is wallowing in six-month lows near 1.0550 against the US Dollar, as the Fed-ECB monetary policy and macroeconomic divergence are back in play.

The US Federal Reserve (Fed) is widely expected to hike interest rates one more time this year while markets speculate that the September 25 basis points (bps) rate hike by the ECB will likely be the last one. Further, the Eurozone is on the brink of recession while the US economy has shown encouraging signs of resilience, based on the recent strong economic data.

A hotter-than-expected headline and core HICP inflation data could reinforce expectations for one more ECB rate hike by year-end. In such a case, EUR/USD could initiate a recovery toward the 1.0700 level. However, if the bloc’s inflation shows a quicker-than-expected decline, the main currency pair is likely to extend the downside toward 1.0400.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “EUR/USD is on the verge of confirming a Death Cross, represented by the 50-day Simple Moving Average (SMA) crossing below the 200 DMA. Meanwhile, the 14-day Relative Strength Index (RSI) is well within the oversold territory. Thus, the daily technical setup of EUR/USD suggests that a rebound could be in the offing before the next downtrend resumes.”

Dhwani also outlines important technical levels to trade the EUR/USD pair: “The previous day’s high at 1.0575 is the first hurdle on the road to recovery, above which Euro buyers will challenge the 1.0600 hurdle. On the downside, the psychological barrier at 1.0450 could lend some support to the pair, below which a test of the 1.0400 round number cannot be ruled out.”