German inflation eases slightly in August

German inflation fell only slightly in August, data showed on Wednesday, but economists expect the downward trend in headline inflation to gain pace in the coming months.

Consumer prices, harmonised to compare with other European Union countries, increased by 6.4% on the year this month, according to preliminary data from the federal statistics office. Analysts polled by Reuters had forecast harmonised annual inflation of 6.3% after a reading of 6.5% in July.

Non-harmonised inflation in Germany fell to 6.1% in August from July’s 6.2%.

“The next stop will be a sharp drop in German headline inflation in September,” ING’s global head of macro Carsten Brzeski said. ING forecasts German inflation will fall to around 3% by the end of the year.

The inflation rate is likely to fall significantly in the next few months because external cost pressures have decreased, said Ralph Solveen, senior economist at Commerzbank (ETR:CBKG). This was illustrated by import prices, which in July posted their sharpest year-on-year drop since 1987.

“However, stronger wage growth is likely to continue to push up service prices, which is why at least the core inflation rate will probably remain well above the ECB’s target of 2%,” Solveen said.

The data from Germany, the euro zone’s biggest economy, comes as the European Central Bank is still looking for evidence that underlying inflation has turned a corner.

Germany’s core inflation rate, which excludes volatile items such as food and energy, was 5.5% in August, unchanged from July.

Food prices continued to show above-average growth, posting a 9.0% year-on-year increase. Energy prices were 8.3% higher on the year, after government relief measures kept prices lower last summer.

The ECB will keep a close eye on euro zone inflation data, which will be published on Thursday, following the German reading and a higher-than-expected inflation figure in Spain.

Economists polled by Reuters expect the inflation rate across the 20 countries that use the euro to fall to 5.1% in August from 5.3% in July.

Wednesday’s data mean the euro zone headline and core inflation rates will probably be a touch higher than previously anticipated, Capital Economics’ chief Europe economist Andrew Kenningham said.

“As this is the last inflation print before the ECB’s September meeting, it could be enough to tip the balance in favour of a further 25 basis points rate hike, though it looks set to be a close call,” Kenningham said.

The ECB’s next monetary policy meeting is on Sept. 14.

Inflation remains far above the central bank’s 2% target and could take until 2025 to fall back to that level, but weak economic data is intensifying the debate over just how much more the ECB needs to do.

“As long as the ECB sticks to its current stance of putting more policy emphasis on actual data rather than expected data, a rate hike at the September meeting has become likelier,” ING’s Carsten Brzeski said.