German Inflation Slows Below 2% as ECB Rate-Cut Bets Rise

German inflation eased below the European Central Bank’s 2% target for the first time since February 2021 — supporting the case for another cut in interest rates in less than three weeks.

(Bloomberg) — German inflation eased below the European Central Bank’s 2% target for the first time since February 2021 — supporting the case for another cut in interest rates in less than three weeks.

Consumer-price growth in Europe’s largest economy slowed to 1.8% in September from 2% the previous month – in line with the median estimate in a Bloomberg survey. The retreat was down to energy and some goods costs, according to statistics agency Destatis.

The data confirm the trend seen in regional German numbers earlier Monday, though those releases also contained evidence of sticky underlying price pressures that could yet make more hawkish policymakers cautious about quicker monetary loosening.

The headline trend across the region, however, has been one of moderation: Following drops below 2% in France and Spain on Friday, Italy said Monday that its inflation rate fell to less than 1% this month.

That — alongside more gloomy signals on economic growth — is prompting markets to bet on a third reduction in the ECB’s deposit rate on Oct. 17, with investors putting the chances at about 75%.

Germany’s government is set to cut its prediction for Europe’s biggest economy and now expects no expansion at all this year, according to people familiar with the matter.

Inflation data for the 20-nation euro zone will arrive Tuesday and are expected to show a slowdown to 1.8% from 2.2% in August. But the ECB expects a pickup toward year-end due to base effects. It only sees a sustainable return to target in late 2025.

President Christine Lagarde will address European Union lawmakers at 3 p.m. in Brussels — her first opportunity to comment on last week’s huge buildup in rate-cut wagers. Despite price gains cooling, some of her colleagues may still be reluctant to back faster policy easing as they worry about elevated services inflation that topped 4% in August.

“Today’s figures don’t definitively solve the inflation problem,” Deutsche Bank economist Sebastian Becker said. “The still-elevated core inflation rate would also have to fall noticeably for that to happen. And so far, this decline hasn’t materialized. In addition, persistently high wage pressure is likely to ensure that services inflation, and thus core inflation, will probably decline only slowly.”

German services inflation eased slightly in September, with prices increasing 3.8% after gaining 3.9% the previous month.

The Ifo institute said Monday that fewer and fewer companies are looking to raise prices. Its index of price expectations declined to 13.8 points in September — down from 16.1 points and the lowest level since February 2021.

“The economic crisis is reducing the scope for companies to raise their prices,” said Timo Wollmershäuser, Ifo’s head of economic research. “Overall, the inflation rate in Germany in the coming months is likely to remain below the 2%-mark targeted by the ECB.”

—With assistance from Joel Rinneby and Kristian Siedenburg.

(Updates with economist, German services inflation starting in ninth paragraph.)