German Oct inflation falls, winter energy risks sustain ECB rate hike bets

• Germany's October final CPI came in at +2.8% year-on-year, matching the preliminary reading. The prior month was +3.3%.
• Germany's October final HICP also stood at +2.8% year-on-year, in line with the preliminary estimate. That compares with +3.3% in September.

The final data largely confirm the preliminary figures released earlier. The slowdown in inflation in Germany was driven mainly by a more moderate rise in energy costs in October and the reintroduction of a temporary fuel tax cut from 1 October, which is set to last until year-end. However, core inflation measures also declined, with both services and goods prices falling month-on-month.

Destatis commented:

"The main reason for the continued high inflation rate remained the development of energy prices, even though the fuel discount, which was reintroduced at the beginning of October, likely dampened inflation somewhat."

Core annual inflation was confirmed at 2.1% in October, down from 2.4% in September. This should reassure the ECB that price pressures are not accelerating across the eurozone as the year draws to a close.

However, the onset of winter is approaching. Together with low gas storage levels, this is expected to drive up gas prices in the near term, which could eventually feed through to higher consumer prices early next year.

For the time being, the inflation figures provide additional comfort to ECB doves, indicating no second-round effects are yet visible. However, although the data might imply that a December rate hike is not certain, stronger inflation in other regions probably tilts the balance toward another increase before the end of the year. Market pricing reflects this, with around a 79% probability of a 25 basis point rate hike in December.