By Maria Martinez
BERLIN (Reuters) - Inflation in Germany eased noticeably in October, falling to its lowest level since August 2021, pointing to a substantial cooling in headline inflation in the euro zone.
German inflation eased in October to 3.0%, the federal statistics office said on Monday.
German consumer prices, harmonised to compare with other European Union countries, had risen by 4.3% year-on-year in September.
Core inflation, which excludes volatile food and energy prices, fell to 4.3% in October from 4.6% in the previous month.
While headline inflation is likely to ease further in the first few months of the coming year, the core inflation rate should stabilise around 3% by spring at the latest, Commerzbank (ETR:CBKG) economist Ralph Solveen said.
"We expect underlying inflation to remain significantly higher than the ECB would like in the coming year," Solveen said.
Higher-than-forecast inflation is seen as one of the main risks by central bankers, as it could extend the tightening campaign of central banks, keeping interest rates higher for longer.
Euro zone inflation is expected to ease to 3.2% in October from 4.3% in September, according to economists polled by Reuters. Inflation data will be published on Tuesday.
Demographics, derisking and decarbonisation all argue in favour of upward pressure on price levels, ING's global head of macro Carsten Brzeski said.
"At some point in time, the European Central Bank might regret that it redefined its inflation target at 2.0% and not at around 2%," Brzeski said.
GDP FALLS LESS THAN EXPECTED
Separate data on Monday showed Germany's economy shrank slightly in the third quarter, as Europe's largest economy continues to be weighed down by weak purchasing power and higher interest rates.
Gross domestic product fell by 0.1% quarter on quarter in adjusted terms, the federal statistics office said.
A Reuters poll had forecast the economy to shrink by 0.3%.
Looking ahead, the ongoing pass-through of the ECB's monetary policy tightening, still no reversal of the inventory cycle and new geopolitical uncertainties will continue weighing on the German economy, Brzeski said.
"The German economy looks set to remain in the twilight zone between minor contraction and stagnation not only this year but also next year," he said.
The contraction in the third quarter is not seen as an outlier as Commerzbank expects the German economy to contract again in the winter half-year.
"Consumption is unlikely to recover as optimists had hoped," Commerzbank's chief economist Joerg Kraemer said.
Household consumption fell in the third quarter, as high inflation continued to erode consumers' purchasing power.
While consumption in Germany was a drag on GDP, capital investment made a positive contribution, the statistics office said.
"The net result, however, is that Germany’s economy is now firmly stuck in the mud," Pantheon Macroeconomics' chief eurozone economist Claus Vistesen said, adding the he doubts the economy will make headway in the fourth quarter.