Janine Kraft, store manager of the Tante Enso store in Wörlitz, Germany, sorts goods onto the shelves.
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Germany’s annual inflation rate unexpectedly eased to 2% in June, bringing Europe’s largest economy in line with the European Central Bank’s target, preliminary data from statistics office Destatis showed Monday.
Analysts polled by Reuters had expected a reading of 2.2% in the twelve months to June.
The German print is harmonized across the euro zone, allowing for a direct comparison with other single currency states. The consumer price index had eased to 2.1% in the year to May.
Elsewhere in Europe, June inflation readings showed a small rise in the harmonized rate of France and Spain, but no change in Italy.
Franziska Palmas, senior Europe economist at Capital Economics, said the latest inflation data would please the ECB, which is expected to cut rates one more time in this cycle.
“Overall, the figures add to the evidence that inflation in the euro-zone has sustainably returned to the target. Barring a renewed surge in energy prices we expect the headline rate to average 2.0% this year and the ECB to make one final rate cut in September, taking the deposit rate to 1.75%,” she said in emailed comments.
Euro zone inflation data is due on Tuesday, with the headline rate expected to come in at 2% in June, according to analysts polled by Reuters.
Hold the champagne?
While the German data might comfort the ECB that its job to bring the inflation rate back toward the 2% target “is mostly done,” external factors could still upset the disinflation trajectory, according to Carsten Brzeski, global head of Macro at ING.
“Despite the celebrations at the ECB, let’s not forget that disinflation in the euro zone has been largely driven by external factors and lately, by President Trump,” he noted in emailed comment, citing falling oil prices and a stronger euro as important drivers of the trend lower.
Service inflation, however, remains elevated “at levels not seen since the mid-1990s before the pandemic,” Brzeski noted, and is only expected to dip below 3% next year.
“This persistent pressure should temper any premature celebrations at the ECB,” he said.
A projected illumination marking the 75th anniversary of the Schuman Declaration, on the Grossmarkthalle building at the European Central Bank headquarters in Frankfurt, Germany, on May 9, 2025.
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Furthermore, an ongoing disinflationary process is highly dependent on oil prices, “and the last two weeks showed how volatile these prices can be,” he said, referring to a sharp spike in oil prices as Israel and Iran launched attacks on one another’s oil infrastructure.
“For now, and in the absence of another tariff shock after the end of the 90-day pause in less than two weeks from now, we expect the ECB to pause at the next meeting in July and to keep the option open for another rate cut at the September meeting, if the disinflationary trend continues,” Brzeski said.