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In our Market Insights, Prosperity Investment Management examines the latest developments across the globe's biggest financial markets - providing you with all the latest information you need to know.
German inflation posts surprise drop to 2% in August
The German consumer price index (CPI) eased to 2% in August, falling short of many analysts' expectations, according to preliminary data released by the German statistics office.
Recent economist polls had anticipated the CPI to reach 2.3%. In July, the harmonised CPI was recorded at 2.6% year-over-year.
On a monthly basis, the harmonised CPI decreased by 0.2%. Inflation figures are harmonised across the euro area and the European Union to ensure consistency in comparisons.
Core inflation, which excludes energy and food prices, was 2.8% in August, slightly down from 2.9% in July. Destatis also reported a 5.1% annual decrease in energy costs in August.
Earlier on Thursday, several major German states had already reported a slowdown in inflation. This data precedes the release of euro area inflation figures, which investors are keenly anticipating for hints regarding potential interest rate cuts from the European Central Bank (ECB).
Speculation about a possible rate cut in September has been growing after the ECB held rates steady in July, following a rate reduction in June. However, forward-looking indicators, such as wage growth and selling price expectations, suggest that caution remains necessary.
Signs emerge that European Central Bank may look to cut interest rates in near future
Wages in the eurozone rose at a much slower pace during the three months ending in June, creating favourable conditions for the European Central Bank (ECB) to further reduce borrowing costs.
Inflation in the eurozone has eased, with prices increasing by 2.6% in July compared to a year earlier, which falls comfortably within the ECB’s target range.
However, the ECB has been particularly concerned about the persistent inflation in the services sector, which remained at 4.0% in July, unchanged from February. This sector is typically labour-intensive, and strong wage growth in a tight labour market has been a key driver of inflation.
Given this, the ECB was likely reassured by the recent slowdown in wage inflation. The ECB reported that wages negotiated between employers and unions in the second quarter of this year increased by 3.55% year-over-year, down from 4.74% in the first quarter.
This deceleration could lead to a reduction in service sector inflation in the coming months, increasing the likelihood that the ECB will continue cutting interest rates, following its initial rate cut in June.
One possible reason for the slowdown in wage growth is a potential softening of the labour market. In June, the unemployment rate rose slightly from the previous month.
Additionally, the flash PMI for the eurozone indicated a slight decline in private sector employment in August. If these trends continue, wage inflation may decrease further, paving the way for additional monetary easing.
Moreover, many economists have pointed to further signs of a weakening eurozone economy, which would reduce inflationary pressures.
They also noted that the current interest rate levels are tightening financial conditions, heightening the risk of an economic downturn.
US second quarter growth appears stronger than anticipated
The U.S. economy grew at a faster pace than initially estimated in the second quarter of this year, largely due to stronger-than-expected consumer spending.
The economy expanded at an annual rate of 3.0% from April to June, an increase from the earlier estimate of 2.8%. Analysts had not anticipated a revision to the figure.
Despite high interest rates, unexpectedly strong consumer spending has played a key role in supporting the U.S. economy. However, with households beginning to exhaust their pandemic-era savings, there was an expectation that consumer spending might decline.
In the latest revision, the increase in consumer spending was partly offset by downward adjustments in business investment, exports, and government spending. However, imports were revised higher.
The 3.0% growth in the second quarter marks an improvement from the 1.4% growth recorded in the first quarter.
After rapidly raising interest rates in 2022 to combat rising inflation, the Federal Reserve is widely expected to implement its first rate cut since the pandemic in September, which could further stimulate the economy.
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