German inflation drops to 2.8% YoY in October
Lead — The drop in German inflation to 2.8% year-on-year in October signals a fading inflationary environment, considered by the desk as supportive of the ECB's cautious approach to rate hikes. Per the full note, both headline and core inflation measures declined, indicating that inflationary pressures are subsiding across various components of the economy. This shift may give the ECB room to maintain a dovish stance in upcoming meetings. With no major calendar events inflating volatility in the next month, the market may focus on these inflation trends as they evolve.
What the desk is arguing
The recent decrease in German inflation to 2.8% year-on-year in October is a critical signal for the ECB, supporting a narrative of caution rather than urgency in policy adjustments. According to the research, both headline and core inflation measures have declined, reinforcing the perspective that the central bank's strategy of maintaining rates may be prudent as price pressures recede.
Notably, core inflation also fell from 2.4% in September to 2.1% in October, reflecting a broader moderation in inflationary trends beyond temporary factors like tax rebates. This data may give the ECB confidence to adopt a more relaxed stance regarding future rate hikes, as they observe a tangible easing in cost pressures.
Where it sits in our coverage
Our consensus target for the EUR/USD is 1.075, with a range of 1.04 to 1.12. Significant projections include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns closely with jpmorgan, which anticipates a slightly more bullish outlook compared to bofa's more cautious projection. The desk believes this assessment sits near the upper range of our consensus target.
How other firms see it
Firms like jpmorgan and bofa, while presenting different targets, collectively sense a potential for easing inflation to reformulate the ECB's approach. Firm bofa holds a more conservative outlook that contrasts with others expecting a bullish turnaround amidst current inflation trends.
The path for EUR/USD could fluctuate as market participants interpret the implications of these inflation figures relative to macroeconomic indicators and ECB policy adjustments, particularly considering upcoming ECB meetings, where markets may react to further inflation data releases or central bank comments.
What the calendar says
With no significant calendar events scheduled in the coming 30 days, traders should focus on developing trends in inflation data as the principal driver of market sentiment and potential policy directions from the ECB.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01German inflation fell to 2.8% YoY; ECB's cautious approach supported.
- 02No immediate rate hikes expected as inflation pressures ease.
- 03Moderation in core inflation to 2.1% signals broader price stability.
- 04Lack of upcoming calendar events suggests focus on inflation trends.
Market implications
Essential to monitor the EUR/USD as it approaches key psychological levels. The market may respond to inflation updates ahead of the ECB's next meeting, which could alter the expected trajectory.
Risks to this view
Should unexpected geopolitical developments escalate, particularly around energy prices, this could reverse the current inflation trends and compel the ECB into a more aggressive tightening stance, countering the recent dovish signals.
Older quick take Quick take Published 13:15 Germany German inflation drops to 2.8% YoY in October Both German headline and core inflation dropped in October, sending a signal to the ECB that waiting rather than rushing towards the next rate hike was a wise decision Inflationary pressures are fading as German headline inflation came in at 2.8% year-on-year in October, from 3.3% YoY in September. This is not only a tax rebate story, but also a broader-based retreat of inflationary pressures as both core and services inflation also fell. Core inflation fell to 2.1% YoY, from 2.4% YoY in September.
Still no signs of knock-on effects from higher energy prices Looking at the available components at the regional state level, there are still no signs of any indirect effects from higher energy prices on the rest of the economy. All measures of underlying inflation dropped in October, including the often-discussed services inflation. In fact, household energy prices fell month-on-month, probably reflecting the government’s fuel tax rebate.
Meanwhile, weak final demand is evident in falling prices for household goods and leisure, which have now declined for two consecutive months. Comforting signal for ECB doves Looking ahead, the path of headline inflation remains highly affected by the war in the Middle East and oil prices. On top of this, the start of the winter heating season, combined with low gas storage levels, is also likely to push up gas prices in the coming weeks, translating into higher retail prices at the start of next year.
As a result, we expect headline inflation to increase again and remain above 3% towards the end of the year and in early 2027. It could now take until the end of 2027 before headline inflation drops below 2% again. As worrisome as this might sound, the current inflation picture remains structurally different from the inflation wave in 2022.
Despite a recent increase, selling price expectations in services and manufacturing remain below their April and May levels. At the same time, consumers’ willingness and also financial ability to pay higher prices are much lower than in 2022. As a result, it will be hard for companies to pass through higher production costs.
Instead, margin squeezing will be the only game in town. For the ECB, today’s German inflation data will comfort the doves as the numbers show that there are still no indirect or second-round effects in sight. If this situation remains unchanged, even a December rate hike might not be a done deal, yet.
For the ECB to continue on what ECB President Christine Lagarde yesterday called ‘the direction of travel is clear’, some knock-on effects from higher energy prices would be useful. Monetary Policy Inflation Germany Eurozone ECB Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.
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