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German inflation has fallen faster than expected to 3 per cent, its lowest annual rate since June 2021, as a broad-based slowdown in prices brought some relief to consumers in Europe’s largest economy.
September’s deceleration in price growth, which the federal statistical agency said mainly reflected the first drop in energy prices since early 2021, came as separate figures revealed the German economy shrank in the third quarter.
The stagnating economy is helping price pressures to cool rapidly after the biggest surge in the cost of living for a generation last year, underlining why the European Central Bank decided to hold its main interest rate at 4 per cent last week after a series of recent increases.
Figures for the wider eurozone to be released on Tuesday are expected to show inflation in the 20-country bloc has fallen to 3.1 per cent this month, down sharply from 4.3 per cent a month earlier and a peak of 10.6 per cent a year ago.
“This likely marks the end of the rapid part of disinflation,” said Salomon Fiedler, an economist at German bank Berenberg, adding that inflation may even rise “again in December before moving on a more gradual downward path towards 2.5 per cent in the second half of 2024”.
The drop in the harmonised index of consumer prices in Germany from 4.3 per cent in September was bigger than forecast by economists, who had predicted a rate of 3.3 per cent in a Reuters poll.
The core rate of inflation, excluding more volatile energy and food prices, fell to 4.3 per cent from 4.6 per cent. Month-on-month inflation turned negative for the first time since May as prices fell 0.2 per cent.
“The price drops in tourism and hospitality services could be a leading indicator for a broader trend that the time for bargain hunters has come,” said Carsten Brzeski, an economist at Dutch bank ING.
There were further signs of an easing in the cost of living crisis that has hit European households. Spanish inflation was below forecast, despite hitting a six-month high of 3.5 per cent in October, while price growth slowed sharply in Ireland and Belgium.
Falling inflation is yet to provide much of a boost to German economic activity, as consumers and businesses continue to grapple with rising borrowing costs, falling house prices and lower exports to China.
German gross domestic product declined 0.1 per cent in the three months to September from the previous quarter, the federal statistical agency said on Monday. That was a milder contraction than the 0.2 per cent drop forecast by economists, but it confirmed the country’s position as one of the world’s weakest major economies.
Germany’s key manufacturing sector has also been hit by a jump in energy costs linked to a shift away from Russian gas imports after Moscow’s full-scale invasion of Ukraine.
“Despite falling inflation and stronger wage increases, private consumption is unlikely to recover for the time being,” said Jörg Krämer, chief economist at German lender Commerzbank, pointing to a recent fall in already weak consumer confidence.
The shrinking German economy is expected to offset growth in southern European countries such as Spain, where third-quarter output expanded 0.3 per cent, leading to a stagnation in overall eurozone GDP when quarterly figures for the bloc are released on Tuesday.
Germany’s federal statistical agency also revised up GDP figures for the previous two quarters, indicating that the economy stagnated in the first half of the year instead of shrinking as initially indicated.
However, it said German output was still 0.3 per cent lower than a year earlier. That contrasts with the rapid expansion of the US economy, which last week reported 4.9 per cent annualised third-quarter growth.
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