German headline inflation rate falls below zero in July, likely to return to positive territory in August

German inflation rate dropped below the zero line in July. The headline inflation came in at -0.1 percent. Consensus expectations were for the inflation rate to remain a bit positive at 0.1 percent. The fall in consumer prices was spread throughout the entire range: The fall in energy prices deepened in July, while the upward trend in food prices softened markedly.

The main driver behind the significant fall in inflation rate was the reduction in VAT. Between 1 July and 31 December 2020, the regular tax rate will fall from 19 percent to 16 percent and the reduced rate from 7 percent to 5 percent.

Inflation rate is expected to return to positive territory in August, as energy prices should rise again in view of slightly rising oil prices, said Commerzbank in a research report.

“In view of the unexpectedly strong decline in the German inflation rate, there are downside risks to our forecasts of the inflation rate in the euro zone, which will be published tomorrow. So far, we expect the inflation rate to fall from 0.3 percent to 0.2 percent and the core inflation rate from 0.8 percent to 0.6 percent”, added Commerzbank.