Germany's July inflation cooled as expected! Will the European Central Bank pause rate hikes in September?

Germany's inflation cooled down in July, further fueling expectations of a pause in interest rate hikes by the European Central Bank in September.

On Tuesday, August 8th, data released by the Federal Statistical Office of Germany showed that the final value of Germany's Consumer Price Index (CPI) in July decreased from 6.4% in June to 6.2%, in line with expectations. The food inflation rate dropped from 13.7% in June to 11%, but remained at a high level. The core inflation rate slowed down from 5.8% in June to 5.5%.

The Harmonized Index of Consumer Prices (HICP) also decreased from 6.8% in the previous month to 6.5%, which was in line with expectations.

While inflation cooled down, there are signs of stabilization in the German economy.

Previously mentioned by Wall Street News, the GDP data released at the end of July showed that the quarterly GDP growth rate of the "locomotive of the European economy" was 0 this month. However, in the fourth quarter of 2022 and the first quarter of this year, Germany's GDP declined by 0.1% and 0.4% respectively.

The GDP report shows that private household consumption expenditure, after experiencing a weak half-year, has stabilized in the second quarter of 2023.

However, despite the halt in GDP contraction, the outlook for the German economy remains bleak. The key Ifo Business Climate Index for July was only 87.3, lower than the previous and expected values, reaching a new low in eight months.

In addition, Germany's manufacturing Purchasing Managers' Index (PMI) in July fell below 40 to 38.8, lower than the expected 41 and the previous value of 40.6, approaching the level seen when the COVID-19 pandemic first broke out in 2020. The services PMI slowed down for the second consecutive month, dropping from the previous value of 54.1 to 52, and lower than the expected 53.1.

Germany's composite PMI in July fell from the previous value of 50.6 to 48.3, below the boom-bust line and lower than the expected 49.8.

After the CPI data was released, the euro against the US dollar experienced little short-term volatility and is currently trading at 1.10.

German long-term bonds led the gains, with the 10-year government bond yield falling nearly 10 basis points to 2.47%.