German Inflation Climbs More Than Expected Dampening Bigger Rate Cut Hopes

(RTTNews) - Consumer price inflation in Germany increased more than expected to its highest level in three months in October and the core figure moved closer to 3 percent, damping expectations for a bigger size interest rate cut from the European Central Bank.

The consumer price index rose 2.0 percent year-on-year following a 1.6 percent increase in September, preliminary estimates from the statistical office Destatis showed Wednesday. Economists had forecast the inflation rate to climb to 1.8 percent. Inflation, based on the harmonized index of consumer prices or HICP, accelerated to 2.4 percent from 1.8 percent, which also surpassed the 2.1 percent economists had expected.

Core inflation, which excludes food and energy, increased to 2.9 percent from 2.7 percent. Services inflation, one of the main concerns for policymakers because of its stubborn stickiness, rose to 4.0 percent from 3.8 percent.

"The decisive factor for the sharp rise in service prices is likely to be the noticeable increase in wage costs," Commerzbank economist Ralph Solveen said. "Since wages have risen significantly until recently, the only factor to slow prices is the weak economy, which will gradually push down the services inflation."

Food inflation shot up to 2.3 percent from 1.6 percent. Energy prices decreased 5.5 percent after a 7.6 percent slump in September. Goods prices edged up 0.4 percent following a 0.3 percent fall in the previous month.

The CPI rose 0.4 percent month-on-month after remaining flat in September. Economists were looking for a 0.2 percent increase.

The EU measure of inflation HICP also rose 0.4 percent from the previous month, when it decreased 0.1 percent in September. Economists had forecast a 0.2 percent gain.

The ECB has already cut interest rates thrice, the latest being the 25-basis points reduction earlier this month which was mainly due to increasing concerns over the sluggish growth in the euro area.

However, Eurostat flash estimates for the third quarter GDP released earlier on Wednesday showed that the single currency economy Eurozone grew a faster than expected 0.4 percent, underpinned by forecast-beating growth in Germany, France and Spain.

Several ECB policymakers have already signaled another reduction in December, when they will be equipped with the latest round of ECB Staff macroeconomic projections. However, the recent economic indicators and survey data serve to damp hopes for a 50-basis point reduction from the central bank. Further, economists expect inflationary pressures in Germany to increase further in the coming months as the base effects of energy prices fade.

The better-than-expected growth figures for Eurozone and the acceleration in inflation in Germany are set to make some ECB members start doubting both the October rate cut decision and the opening to even larger rate cuts, ING economist Carsten Brzeski said.

"Today's macro data releases in the eurozone, however, should encourage the ECB hawks to object to a 50bp rate cut in December. At least for now," Brzeski added.

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