October state inflation cools in Germany, but ECB's headache lingers

The following state-level figures were released around the same time:

• Bavaria: September CPI came in at +2.8% y/y, versus +3.2% in the prior reading
• Saxony: September CPI was +2.9% y/y, after +3.3% previously
• North Rhine Westphalia: September CPI was +2.7% y/y, compared with +3.3% in the last release
• Baden Wuerttemberg: September CPI stood at +2.6% y/y, down from +2.9% in the prior reading

After price pressures quickened in September, headline inflation across the German states is now expected to cool a little. Base effects explain some of that, and the restoration of certain energy tax reductions and fuel discounts put in place at the start of the month is arguably also a factor.

That leaves overall price pressures softer, although they remain relatively elevated compared with the months preceding the recent uptick.

Taken together, the regional estimates point to a decline in German inflation at the national level as well. Annual headline CPI is forecast to ease to 3.0% in October from 3.3% a month earlier, and the state readings above suggest a modest chance that the final figure could come in under 3%.

The regional numbers, of course, are not an exact substitute for the national figure, so some difference is possible when the preliminary data come out later. Historically, however, they have been a useful gauge, and the latest readings arguably point to downside risk for the consensus forecast of 3.0%, with a national CPI print near 2.9% looking quite plausible.

For the ECB, the latest state numbers make the situation more complicated, as growth conditions are flagging and price pressures could accelerate further. German inflation may not have jumped in October, but France and Spain earlier showed price increases beginning to spread more broadly.

That keeps the pressure on policymakers to act again in December, even as they weigh whether going too far could risk tipping the euro area economy over the edge.