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Germany's Inflation Rate Moderately Declines in August

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Clarence L. Polk

• August 30, 2023

Germany's annual inflation rate experienced a slight decrease in August, although it remained higher than anticipated. The rise in energy prices and the consistent core rate suggest that the European Central Bank may consider further interest rate hikes to better manage inflation.

According to preliminary data from the German statistics office Destatis, consumer prices in August were 6.1% higher compared to the same period last year, slightly down from July's 6.2%. Economists surveyed by The Wall Street Journal expected a rate of 6.0%, making the actual figure slightly higher than the predicted value.

The increase in inflation was mainly driven by energy-price inflation, which rebounded to 8.3% in August from July's 5.7%. Destatis attributed this partly to base effects resulting from government assistance for energy bills in the previous year. On the other hand, food inflation cooled down to 9.0% in August compared to the prior month's 11.0%.

While food and energy prices contribute significantly to consumer prices, core inflation provides a measure of underlying inflation by excluding these volatile components. The core inflation rate remained at 5.5% in both August and July, maintaining the interest of ECB policymakers.

Despite the expectation of a pause in rate hikes due to signs of economic stagnation and decreasing business sentiment, the higher-than-expected reading of German inflation suggests that the ECB may still consider raising its key rate of 4.0% next month. It is important to note that on an EU-harmonized basis, German inflation reached 6.4% in August, surpassing the ECB's target of 2%.

The German economy posted zero growth in the second quarter of this year and is expected to contract in its entirety for 2023. This decline can be attributed to both ECB tightening as well as weakening global demand, particularly from China, for German goods.

In conclusion, Germany's inflation rate showed a modest decline in August but remains a concern. The European Central Bank may need to implement further measures to manage inflation effectively and ensure economic stability.