German inflation eased further in October, dropping to 2.8% year-on-year from 3.3% in September. The decline was not solely due to tax rebates but reflected broader cooling of inflationary pressures, with both core and services inflation also falling. Core inflation, for instance, decreased to 2.1% from 2.4% the previous month.
Despite higher energy prices, there are no signs of indirect effects on the broader economy. Household energy prices even fell month-on-month, likely due to government fuel tax rebates. Weak final demand is evident in falling prices for household goods and leisure, which have declined for two consecutive months.
For the European Central Bank (ECB), the data offers comfort to policymakers favoring lower interest rates, as there are no second-round effects from energy prices. However, future inflation remains uncertain due to the Middle East war, oil prices, and the upcoming winter heating season, which could push gas prices higher and drive retail prices up early next year.
Looking ahead, headline inflation is expected to rise again, potentially staying above 3% until late 2027 before dropping below 2%. Unlike the inflation surge in 2022, current conditions show lower selling price expectations and reduced consumer willingness to pay higher prices, making it difficult for companies to pass on increased production costs.