Commentary Directory

Germany's September CPI Report: A Clearer Picture of Inflation Trends

Jacob Hess
September 28, 2023

Germany’s inflation rate sees a strong deceleration in September thanks to some base effect magic. The CPI was up 0.3% MoM and 4.5% YoY in September, down from 6.1% YoY in August. The slowdown in the annual rate can be attributed to the discontinuation of the German government’s final inflation relief measures including the fuel discount which impacted energy prices and the 9-euro ticket which impacted services prices. Regardless of that, it is notable that this annual increase in headline CPI inflation is the lowest since February 2022 when it was 4.3% YoY.

From Destatis

The discontinuation of the fuel discount relief program last year led to a significant surge in energy prices. As a result, September 2023’s energy CPI inflation has cooled down considerably. From a high 8.3% YoY in the previous report, it plummeted to just 1.0% YoY. This figure now offers a more accurate reflection of the oil and gas price situation, devoid of any distortions caused by government price controls. Unlike energy, food CPI wasn't influenced by the 2022 government relief measures. Yet, it too experienced a slowdown this month. From 13.7% YoY at the start of the summer, it dropped to 9.0% YoY a month ago and now stands at 7.5% YoY. Food inflation has been on a downtrend in 2023 which will likely continue through the end of the year.

Core CPI, which excludes food and energy, also felt the ripple effects of the expiration of government relief measures. It slowed down to 4.6% YoY in September, a drop from the 5.5% YoY recorded in both July and August. Goods prices, influenced by fuel prices, are still up by 5.0% YoY, but this is a significant decrease from the 7.1% YoY of the previous month. However, the most notable revelation from the report is the significant deceleration in services inflation. It dropped by 1.1 percentage points to 4.0% YoY, finally breaking below the 5% threshold where it had been lingering for a while.

Germany's CPI readings had been skewed for a considerable period due to the government relief packages introduced as a countermeasure to inflation. Now, with those distortions out of the picture, two main observations emerge:

  • Germany's services inflation is currently lower than the overall euro area rate. This suggests that the upcoming Eurostat inflation report will show a significant deceleration in services inflation for the whole euro area, a measure closely followed by the ECB.
  • Germany's goods inflation, which does include energy and food, stands high at 5.0% YoY. It's not often that we see the goods annual rate surpass the services annual rate these days, but in Germany, this is the case.

One thing that is distorted in this report is how much of the deceleration in the inflation rates across all categories are attributed to the relief package and how much is a result of tighter financial conditions. That means that the monthly rates, which are reported in the final version of the Destatis inflation report, are especially important for September.