German inflation drops to 2.8% YoY in October

German inflation is easing broadly enough to support a slower ECB tightening path, although energy risks could temporarily reverse the decline.

• Headline inflation fell to 2.8% year-on-year in October from 3.3% in September, while core inflation dropped from 2.4% to 2.1%.
• All available measures of underlying inflation declined, including services inflation, with no evidence of indirect effects from higher energy prices.
• Household energy prices fell month-on-month, likely reflecting the government’s fuel tax rebate, while household goods and leisure prices declined for a second consecutive month as final demand weakened.
• The authors expect headline inflation to rise above 3% toward the end of the year and in early 2027 because of Middle East and oil-price risks, winter heating demand and low gas storage levels; inflation may not fall below 2% until the end of 2027.
• Unlike in 2022, selling-price expectations in services and manufacturing remain below their April and May levels, while consumers have less willingness and financial ability to accept higher prices, limiting companies’ ability to pass through costs and increasing margin pressure.

Takeaway: The data strengthen the ECB’s dovish case and mean that even a December rate hike is not certain, but renewed energy-price pressures remain a significant upside risk to headline inflation.