Inflation accelerated in four German states in July, with Bavaria's annual rate reaching 2.8% and North Rhine Westphalia's climbing to 2.7%. The state readings point to a higher national print and reinforce the narrative that the European Central Bank may have to act in September. Traders are pricing around 65% odds of a hike at that meeting.
German price pressures turned higher this month. Bavaria's annual inflation rate rose to 2.8% in July from 2.5% in June, while North Rhine Westphalia's climbed to 2.7% from 2.1%.
Two more states moved the same way. Baden-Wuerttemberg's rate rose to 2.5% from 2.1% and Lower Saxony's ticked up to 2.7% from 2.5%, according to preliminary data published on Thursday.
Monthly prints run hot as well
The month-on-month figures accelerated too, with Bavaria recording 0.6%, North Rhine Westphalia 0.9%, Saxony 0.6% and Baden Wuerttemberg 0.8%.
Because the state prints feed the national inflation series, the headline figure looks set to follow them up. The national reading is expected at 2.7%, still higher than the 2.3% recorded in June. Economists polled by Reuters forecast a harmonised national rate of 2.8% in July, up from 2.4% in the previous month.
Iran's war had pushed up energy and raw material prices in previous months. The German government now expects inflation to accelerate to 2.7% this year and 2.8% in 2027.
ECB tightening back in view
The ECB kept borrowing costs on hold in July but left room for more tightening in the coming months, as a widening conflict in the Middle East pushed up energy prices again. An accelerating July print therefore puts a rate hike back in the frame.
Traders are pricing around 65% odds of the ECB hiking rates next in September. InvestingLive argued that if the inflation trend keeps as it is in the next month, it would be reasonable to see traders price a move at the next meeting rather than in October.
German growth beats expectations
Separately, German preliminary Q2 GDP rose 0.2% on the quarter against 0.1% expected. Q1 growth was revised to 0.4% from 0.3%.
Destatis said a rise in exports was arguably the key reason, while preliminary findings saw consumer spending remain subdued and investment decline.
The euro zone print comes next: inflation in the bloc is expected at 2.9% in July, slightly above 2.8% in the previous month, according to economists polled by Reuters.
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