Eurozone CPI set to weaken in November after German, Spanish numbers fall short

© Reuters.

By Geoffrey Smith 

Investing.com -- Eurozone inflation is on track to turn out lower than expected for the first time in months in November, as the economy slows and sharp rises in energy prices a year ago start to pass out of the calculations.

The federal state of North Rhine-Westphalia, Germany's largest state by population, said on Tuesday that consumer prices fell 0.8% on the month, a much sharper decline than the 0.2% expected by analysts, and a sharp reversal from October's 1.2% increase. A handful of other large states reported smaller declines, ranging from 0.3% in Bavaria to 0.5% in Brandenburg.  

German government bond yields moved sharply lower on the numbers, which hinted at an earlier and lower end to this year's surge in inflation, and consequently to an earlier end to the European Central Bank's interest rate hikes. The ECB has raised its key rates by 2 percentage points over its last three meetings. The euro edged up 0.3% to $1.0367, helped also by improving risk sentiment on signs of China moving slowly towards ending its COVID-Zero policy.

The Federal Statistics Office Destatis will release a preliminary nationwide figure for Germany at 08:00 ET (13:00 GMT) on the basis of the states' figures. The states' figures suggest that the national rate may fall back below 10%, after hitting 10.4% in October, its highest in over 50 years. 

Elsewhere in the Eurozone, CPI numbers from Spain also indicated that November's data may turn out better than expected. The INE statistics office said prices fell 0.1% according to the national measure of inflation, bringing the year-on-year rate down to 6.8%, its lowest since February. Spanish inflation peaked in August at 10.8% and the annual rate has now slowed for three straight months. However, ECB President Christine Lagarde told the EU Parliament on Monday that she didn't think Eurozone inflation has peaked yet. 

Analysts warned that the underlying trend in both sets of numbers looked worse than the headline development, which was largely a result of base effects. 'Core' inflation in Spain accelerated to 6.3% on the year, noted Piet Haines Christiansen, chief strategist with Danske Bank. 

"This is a pyrrhic win for the (ECB) doves as underlying inflation points to more sticky inflation," Christiansen tweeted. "Hawks will point to the underlying inflation." 

Likewise, the decline in North Rhine-Westphalia owed much to volatile energy prices, specifically to declines in the price for heating oil and solid fuels, although there were also big year-on-year declines in prices for some consumer durables such as televisions. 

By 04:40 ET (09:40 GMT), the yield on the benchmark 10-Year German bond was down 10 basis points at 1.90%, while the more interest rate-sensitive 2-Year yield was down 13 basis points at 2.05%. That also dragged bond yields down in parallel around the rest of the Eurozone, with slightly larger falls in Italian yields.