Inflation in Europe's largest economy accelerated for a third consecutive month in August, but the rise was gentler than markets had braced for, offering a sliver of comfort to policymakers in Frankfurt ahead of their rate-setting meeting next week.
Preliminary figures from the Federal Statistical Office (Destatis) showed the harmonised index of consumer prices (HICP) climbing 0.2% month-on-month, against a forecast 0.3%, lifting the annual rate to 2.9% from 2.8% in July. The reading follows 2.4% in June, when the expiry of Germany's fuel duty discount and an energy shock linked to the war in Iran began to feed through.
The harmonised measure, compiled using a methodology common to all EU member states, is the gauge the European Central Bank uses to assess whether it is meeting its 2% target. While the latest figure remains well above that goal, the undershoot relative to the 3.1% consensus is what will resonate most in Frankfurt.
Mixed signals from the German economy
The inflation data lands alongside a batch of releases that paint a contradictory picture of the German economy. Second-quarter GDP was revised up to 0.3% growth from an initial 0.2%, with Destatis president Ruth Brand noting that “the German economy is maintaining the momentum seen at the start of the year.” Exports were the primary engine, with goods exports rising 2.6% on the quarter.
Yet domestic demand remains fragile. Investment in machinery and equipment fell 1.4%, while household and government consumption each managed just 0.1%. The labour market continues to soften, with roughly 45.7 million people in work—212,000 fewer than a year earlier.
Germany's growth also lagged the wider EU, which expanded 0.5% in the same period. Public finances have deteriorated sharply: the government's deficit reached €71.3 billion in the first half of the year, €36.6 billion more than a year earlier and equivalent to 3.1% of GDP. The federal government accounted for €48.1 billion of that shortfall, as spending outpaced revenue.
What it means for the ECB
For the ECB, the direction of German inflation matters less than the deviation from expectations. The central bank raised its deposit rate to 2.25% in June—its first hike in nearly three years—and held steady in July. Whether it moves again next week has been the central question in eurozone markets since.
A German print above 3% would have strengthened the hawks considerably. Instead, the largest eurozone economy delivered inflation that is still rising and still above target, but decelerating against expectations, alongside an economy expanding only modestly and shedding jobs. That combination gives the ECB's governing council room to pause, though the debate is far from settled.
Friday's data from Spain and France underscored how uneven the picture is across the currency union. Spain's harmonised rate leapt to 4.5% in August from 3.9%—the highest in over a year—after fuel prices rose in a month when they had fallen a year earlier. Core inflation there eased to 2.9%, suggesting energy and base effects rather than broad-based pressure, but the headline gap with Germany now exceeds 1.5 percentage points.
France recorded the mildest acceleration of the three, with its harmonised rate rising to 2.7% from 2.4%. Energy prices in France were up 16.7% year-on-year, accelerating from 12.6% in July.
Ultimately, that is the ECB's main challenge: setting one interest rate for economies whose inflation rates are pulling apart. The German data may ease immediate pressure, but the divergence between member states will keep the debate alive well beyond next week's meeting.
