Germany Inflation back near the zero line

The German inflation rate has declined again in July, and at 0.2%, it is now only just above the zero line. More steeply falling energy prices, which were responsible for the decline, have probably also pushed the euro zone inflation rate down to 0.1%. But there is no reason for new fears of deflation, as higher labour costs will intensify underlying inflation pressure in Germany. Moreover, energy prices should soon touch bottom and rise again from the turn of the year onwards.

"In July, the German inflation rate has declined - against consensus expectations - to 0.2% from 0.3% in June . The lower inflation rate is mainly due to prices for energy, which have fallen somewhat more steeply on the year than in June. Also, upside pressure on food prices has eased further. At the same time, the core rate of inflation presumably continued to hover at 1.1%", says Commerzbank.

More steeply falling energy prices and lower upside pressure on food prices have probably also ensured a decline in the euro zone inflation rate. According to our estimates, this rate amounted to 0.1% in July, down from 0.2% in June. This could provide fresh fuel for speculation about a possible deflation.

Such deflation fears would be exaggerated, though. As the oversupply diminishes on the oil market, energy prices in Germany should soon touch bottom and even rise again at the turn of the year. It is expected that, the core rate of inflation will increase again step by step in the coming months, as an acceleration of labour costs, which is partly due to the minimum wage, is intensifying underlying inflation pressure, notes Commerzbank.