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German inflation likely to be close to 2% in August

  • The German statistics office Destatis will publish the CPI data on Thursday.
  • The headline CPI is expected to rise by 2.1% in August compared to the previous year.
  • The ECB is still far from deciding on an interest rate change in September.

Next month, the European Central Bank (ECB) will meet to review its monetary policy. Therefore, the inflation data from Germany (Harmonised Index of Consumer Prices, HICP) scheduled for Thursday are particularly important as they could have a potential influence on the central bank's policy decisions.

Meanwhile, the euro (EUR) could give up some of its recent strong uptrend, especially against the US dollar (USD), if inflation data from eurozone economies, particularly Germany, point to a sustained disinflationary trend.

What can we expect from the upcoming German inflation report?

The Federal Statistical Office (Destatis) will release the official data on Thursday. Germany's annual consumer price index (CPI) is expected to rise by 2.1% in August, below the 2.3% increase reported in the previous month. Monthly CPI inflation is expected to show a modest increase of 0.1% over the period.

The annual Harmonised Index of Consumer Prices (HICP) in Germany is expected to fall to 2.3% in August, from 2.6% in July. The monthly HICP is expected to remain unchanged last month, after an increase of 0.5% in July.

A further cooling of inflation in Europe's largest economy could point to lower eurozone-wide inflation figures due on Friday. Building on that, the eurozone's headline CPI is expected to rise 2.2% in the year to August, a slowdown from the 2.6% rise in July, while core inflation, which excludes food and energy costs, is also expected to fall to 2.8% over the same period, after a 2.9% rise in the previous month.

On Tuesday, Dutch politician Klaas Knot argued that the European Central Bank (ECB) could gradually cut interest rates as long as inflation is expected to reach its 2% target by the end of 2025 at the latest. He expressed satisfaction with a gradual release of the brakes, provided that the disinflation path continues to aim for a return to 2% inflation by then. Knot also mentioned that he would have to wait for the full set of data and information before he could establish his position on whether a rate cut in September would be appropriate.

This cautious tone followed comments from ECB chief economist Philip Lane over the weekend, who noted that there was still no guarantee that the central bank could successfully reduce inflation to its 2% target, suggesting that a tight monetary policy remained necessary. Lane also stressed that monetary policy must remain in the tight range for as long as necessary to guide the disinflation process towards a timely return to target. However, he also warned against keeping high interest rates for a prolonged period, as this could lead to persistent below-target inflation.

Ahead of the release, TD analysts noted: “Strong base effects in energy components will help euro area headline inflation move closer to target – in the EZ, headline inflation is likely to fall to 2.1% y/y, while German HICP inflation should fall to 2.2% y/y. Core inflation, while stable, should remain on a disinflationary path.”

When will the HICP inflation report be released and what impact could it have on EUR/USD?

The preliminary HICP inflation report for Germany is scheduled to be released at 12:00 GMT. Ahead of this inflation data release, EUR/USD appears to have lost some of its upside momentum after hitting new highs for 2024 just above 1.1200 earlier in the week.

Markets have now priced in an easing of monetary policy by the US Federal Reserve (Fed) of around 100 basis points in the second half of the year, with the easing cycle set to begin as early as September. However, it is not entirely clear whether the ECB will follow suit, as recent cautious comments from rate-setters show. So far, the broader debate seems to have shifted to the health of both economies, with the US clearly holding a decent advantage.

If headline and core inflation figures come in better than expected, this could reinforce expectations of another ECB rate hike in the coming months, which would boost the European currency and open the door for a continuation of the ongoing uptrend in the EUR/USD pair. On the other hand, a negative surprise, i.e. an acceleration of the disinflationary trend, could rob the euro of some of its strength, thus setting off a likely reversal to lower levels.

Pablo Piovano, senior analyst at FXStreet.com, points out that breaking the 2024 peak at 1.1201 (August 26) could likely set the pair on a journey to the 2023 peak at 1.1275 (July 18), supported by the 1.1300 milestone.

In case of bearish attempts, Pablo suggests that the first challenge should be the weekly low of 1.0881 (August 8), which seems to be reinforced by the interim 55-day SMA at 1.0879 and ahead of the critical 200-day SMA at 1.0851.

All in all, the pair’s constructive trend is likely to continue as long as it trades above the important 200-day SMA, Pablo concludes.

Economic indicator

Consumer Price Index (MoM)

The Consumer Price Index (CPI), published monthly by the German statistics office Destatis, measures the average price change for all goods and services purchased by private households for consumption purposes. The CPI is the main indicator for measuring inflation and changes in purchasing trends. The MoM value compares the prices of goods in the reference month with those of the previous month. A high value is bullish for the euro (EUR), while a low value is bearish.

Read more.

Frequently asked questions about inflation

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a monthly (MoM) and annual (YoY) basis. Core inflation excludes more volatile items such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the number that economists focus on and is the target level of central banks, whose job it is to keep inflation at a manageable level, usually around 2%.

The Consumer Price Index (CPI) measures the change in the price of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a monthly (MoM) and annual (YoY) basis. The core CPI is the figure targeted by central banks as it excludes the volatile food and fuel imports. When the core CPI rises above 2%, it usually leads to higher interest rates and vice versa when it falls below 2%. Since higher interest rates have a positive effect on a currency, higher inflation usually leads to a stronger currency. The opposite is true when inflation falls.

Although it may seem counterintuitive, high inflation in a country drives up the value of its currency, and vice versa when inflation is low. This is because the central bank usually raises interest rates to combat higher inflation, which attracts more global capital inflows from investors looking for a lucrative place to park their money.

Gold used to be the asset that investors relied on during times of high inflation because it preserved its value. And while investors often still buy gold as a safe haven during times of extreme market turmoil, in most cases this is not the case. That's because when inflation is high, central banks raise interest rates to combat it. Higher interest rates are negative for gold because they increase the opportunity cost of holding gold compared to an interest-bearing asset or putting the money in a bank deposit account. On the other hand, lower inflation tends to be positive for gold because it lowers interest rates and makes the precious metal a more profitable investment alternative.

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