Inflation in Germany falls again in September to 1.6%

Inflation in Germany fell in September to an annual rate of 1.6%, the second month in a row that inflation has been below the 2% threshold, according to preliminary figures released by Germany's Federal Statistical Office on Monday.

In August, annual inflation in Europe's largest economy was 1.9% compared to the same month in the previous year, the agency previously reported.

That puts inflation in Germany at its lowest level in more than three years.

Economists predict that inflation in Germany will continue to fall.

In their recently published autumn report, a group of leading German economic research institutes forecast consumer prices to rise by 2.2% in the current year, down significantly from 5.9% in 2023. They predicted inflation will be 2.0% in 2025.

Lower inflation in Germany will likely give the European Central Bank (ECB) more leeway to adjust key interest rates as monetary policy leaders seek to balance fighting inflation with economic growth.

Energy leads decline

Lower energy prices in particular brought down inflation, with costs 7.6% lower compared to the previous month. Prices for food and services, meanwhile, rose slightly.

The upward trend in prices had already slowed considerably in recent months. The inflation rate in July was 2.3%.

The closely watched core inflation rate, which excludes the highly volatile prices for energy and food, fell slightly from 2.8% to 2.7%.

Consumers still reluctant to spend

Lower inflation has not yet boosted confidence among German consumers, however, even as wages continue to rise and regain ground after losing value during the high point of inflation.

According to the latest GfK consumer climate index, sentiment remained at a very low level in September. The survey found that many Germans are putting away cash in savings instead of spending money or investing in projects like home construction.

That has many economists worried about the outlook for Germany's weak economy, which remains on the brink of recession.

Private consumption is a major driven of Germany's economy alongside exports, which have also faced challenges amid a slowdown in global demand and stiff competition from Chinese rivals.

Further ECB cuts to come?

The ECB is explicitly tasked with bringing the annual inflation rate across the eurozone below 2%. The ECB's Governing Council approved an unprecedented series of interest rate increases beginning in July 2022 aimed at addressing high inflation across the bloc.

But the ECB cut rates in June of this year and again earlier this month, citing declining inflation.

The ECB's Governing Council next meets in October.

Stock prices suggest that investors are confident that further interest rate cuts are on the way, although experts are less sure about whether such a decision will come at the October meeting.