German inflation falls to 2.3% as ECB eyes more hikes
German consumer price growth cooled to 2.3% in June due to a temporary fuel tax cut and falling oil prices, but the expiry of that discount and persistent supply chain costs mean the European Central Bank is likely to keep raising interest rates.
German inflation eased to 2.3 percent in June, down from 2.6 percent the previous month, according to provisional figures from the Federal Statistical Office. The decline provides temporary relief for a population that has faced sharp increases in the cost of everyday goods since the outbreak of war in the Middle East in late February.
The slowdown was largely engineered. A government fuel discount, which reduced costs by nearly 17 cents per litre, suppressed prices at the pump. Ruth Brand, head of Destatis, noted the measure had a clear dampening effect. Falling global oil prices also helped, with North Sea Brent crude dropping to roughly $72, a 43 percent decline from its crisis peak of $126.
Bond markets reacted to the easing price pressures. The yield on Germany's 10-year government bond fell to 2.84 percent, down from 3.17 percent during the peak of the Iran conflict. Metzler Asset Management chief economist Edgar Walk said there are "clear signs" that inflation volatility is easing.
Underlying costs remain
Beneath the headline figure, risks are building. The Bank for International Settlements warned that supply chain bottlenecks are pushing up the cost of key intermediate goods, with plastics and fertilisers rising by 30 and 50 percent respectively. Commerzbank chief economist Jörg Krämer cautioned that companies are only now passing these energy and cost shocks onto consumers. "So there’s more to come," he said.
The temporary nature of June's relief will become apparent in July. The fuel discount expired on June 30, and Krämer expects inflation to "rise again" as a result. However, the threat of a damaging wage-price spiral appears contained. Walk noted that wage growth is currently falling, and an ifo Institute survey showed fewer German companies plan to raise prices.
The European Central Bank is not yet convinced the battle is won. Having raised interest rates on June 11 for the first time in three years, the bank is preparing further action. ECB Executive Board member Isabel Schnabel said rates must rise further to hit the two percent target. Walk added that the central bank is "worried that it will lose confidence again" following the 2022 surge, and "wants to avoid that at all costs."
