Inflation in Germany and Spain fell in November, prompting a rally in eurozone government bonds as investors bet that price growth in the bloc had peaked and the European Central Bank would shift to smaller interest rate rises.
A slowdown in energy and services prices helped inflation in Germany to fall in line with expectations to 11.3 per cent in the year to November, down from a 71-year peak of 11.6 per cent in October, according to data from the country’s federal statistical agency on Tuesday.
Annual inflation in Spain fell more than expected, from 7.5 per cent in October to 6.6 per cent in November, because of lower fuel and electricity prices, its national statistics agency said on Tuesday. Inflation dropped from 12.3 per cent to 10.6 per cent in Belgium.
But the data showed that price pressures in some parts of the economy remain high. In Spain, core inflation — a measure which excludes changes in energy and food prices — rose slightly to 6.3 per cent. Meanwhile, food prices rose in Germany at a faster pace of 21 per cent, and rental prices in the country also accelerated slightly to 1.9 per cent.
Carsten Brzeski, head of macro research at ING Bank, said he was “still a bit cautious to call this peak inflation”, saying there were still significant price pressures for companies to pass on to consumers that could lead to another increase in inflation before February.
But he said eurozone inflation was likely to fall for the first time in 17 months when November price data are published on Wednesday, making it less likely that the ECB will raise rates by 0.75 percentage points for the third consecutive time when it meets in two weeks.
“With inflation no longer increasing, the arguments for another jumbo rate hike become weaker,” he added.
ECB president Christine Lagarde said on Monday that she “would be surprised” if eurozone inflation had peaked, telling legislators in Brussels that there was still more “pass-through” from high wholesale energy prices to consumer prices to come.
However, a sharp fall in European wholesale energy prices combined with an easing of supply chain bottlenecks has recently encouraged hopes that eurozone inflation is slowing. US inflation also fell in October and global data indicators suggest that this year’s rampant global inflation has peaked.
“It’s looking likely that we’ve seen the peak,” said Peter Schaffrik, chief European macro strategist at RBC, a bank, adding that even a slow decline in eurozone inflation should be sufficient to halt the sell-off that has swept the region’s bond markets this year.
“Recently the figures had kept on surprising to the upside,” said Shaffrik. “You just needed for things to stabilise and [now] yields look attractive from here.”
Futures markets now imply a peak for the ECB’s deposit rate of just above 2.75 per cent in July next year, a decline of roughly 0.1 percentage points prior to Tuesday’s inflation data.
Two-year German debt, which is highly sensitive to interest rate expectations, rallied on Tuesday, pushing yields down by 0.1 percentage points to 2.09 per cent. The euro lost early gains against the dollar, before partly rebounding to trade up 0.2 per cent at $1.0361.