German Inflation Hits Near Three-Year High as Energy Prices Surge

German inflation has risen to its highest level in nearly three years, reaching 3.3% year-over-year in September. This surge is largely attributed to higher energy prices.

The European Central Bank (ECB) may be concerned by these numbers, but core inflation remained unchanged at 2.4% YoY and services inflation even decreased to 2.7% YoY from August's 2.8% YoY. This suggests that inflation is currently mainly an energy price phenomenon.

Looking ahead, the path of headline inflation remains highly affected by the war in the Middle East and oil prices. In its base case scenario, ING assumes that the war will continue and relief will only come after the US mid-term elections. Against this backdrop, headline inflation is expected to remain above 3% at least until early 2027.

The ECB's dilemma is worsening as it tries to react to a supply-side shock driven by surging energy prices with limited knock-on effects across the broader economy. An expected ECB hike in December would be considered an 'insurance rate hike', but additional hikes increase the risk of an unwarranted slowdown of the economy.