German headline inflation eases slightly more than expectations in September

German inflation eased slightly more than expected in September on slower rise in energy and food prices. Inflation slowed down to 1.2 percent in the month from August’s 1.4 percent, as compared with consensus expectations of 1.3 percent. Energy prices dropped 1.1 percent year-on-year after having risen 0.6 percent in the prior month. Meanwhile, food prices rose 1.3 percent in September, only half as much as in August. On the contrary, the core inflation rate rose to 1.5 percent from 1.4 percent in the prior month.

The trend of underlying inflation in Germany slowly intensifying since the start of 2019 is therefore continuing, noted Commerzbank in a research report. In 2016/2017, the core rate had moved around an average of 1.2 percent and rose a bit to 1.3 percent in the first quarter of 2019. Core inflation, in the second quarter, had accelerated to an average of 1.5 percent and most recently stood at 1.6 percent in the third quarter.

The slight upward trend is expected to continue in the medium term. In spite of the current economic softness, the labour market in Germany is in strong shape. Employment continues to grow – albeit at a slightly slower rate in recent months – which, together with the current low level of unemployment is exerting wage pressure. Collective wages in July had risen 6.6 percent year-on-year.

“Even though this increase was extremely distorted upwards by a special effect in the metal industry and lower growth is to be expected again in August, this indicates that wage growth is not about to weaken - as many have been reading from the figures since spring 2019. Wage pressure is therefore likely to remain decent, so that sooner or later it will be virtually impossible for companies to avoid passing on rising (wage) costs, at least in part, to consumers”, added Commerzbank.