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German Inflation Eases to 3-Year Low

Germany’s inflation rate dipped to an annualized rate of 2.2% in March, in line with expectations. The euro has edged higher following the release.

  • Germany’s consumer price index (CPI) climbed 2.2% year-on-year in March, down from 2.7% in February and matching expectations. This is the lowest inflation rate since May 2021.
  • The decrease in inflation was mainly due to lower energy costs and food costs.
  • On a monthly basis, CPI remained unchanged at 0.4%, which was lower than the market estimate of 0.6%.

Core CPI, which excludes food and energy and is considered a more reliable gauge of inflation trends, eased to 3.3% year-on-year, compared to 3.4% in February. This was the lowest level since June 2022.

With German inflation continuing to fall, market expectations are increasing that the European Central Bank (ECB) will lower rates, with an initial cut expected in June. Despite the steady drop in inflation, ECB policy makers have been sending out a hawkish message, saying that the battle against inflation is not over and there is no rush to cut rates.

Although the ECB’s steep rate-hiking cycle has been effective at reining in inflation, ECB members have voiced concern that lowering rates too soon could allow inflation to rebound, which would then require raising rates yet again – a scenario that the ECB is keen to avoid.

The ECB will be keeping a close eye on the eurozone inflation report, which will be released on Wednesday. The market estimate stands at 2.6% for March, which would be unchanged from February. The core rate is expected to tick lower to 3%, down from the February rate of 3.1%. The release will likely be a significant factor in the ECB’s rate path, and a sharper than expected drop in inflation will increase the probability of rate cut in June.

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The euro has been under pressure and was down 0.46% on Monday against the US dollar. The German inflation release hasn’t had much impact as the EUR/USD currency pair is up 0.15% on Tuesday, trading at 1.0759.

The German and European stock markets are showing slight losses in the aftermath of the German inflation report.

The DAX 40 Index, the benchmark German stock index, is lower on Tuesday. The index has declined 112.58 points (0.62%) at 18,378.15.

The EURO STOXX 50 is down 22.29 points (0.44%) at 5060.72.

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