German inflation posts surprise drop to 2% in August

The harmonized German consumer price index eased to 2% in August, coming in lower than analysts had expected, preliminary data from the country's statistics office Destatis said Thursday.

A Reuters poll had forecast the CPI would be 2.3%. In July, the harmonized CPI figure was 2.6% on an annual basis.

On a monthly basis, harmonized CPI dipped by 0.2%.

Inflation readings are harmonized in the euro area and in the European Union to ensure comparability.

Core inflation, which strips out energy and food costs, came in at 2.8% compared with the same period last year, slightly lower than the 2.9% in July. Destatis data showed a 5.1% annual drop in energy costs in August.

Several major German states had reported easing inflation earlier in the day Thursday. The data comes a day before euro area inflation figures are due to be released, which investors will be closely watching for clues about the outlook for forthcoming interest rate cuts from the European Central Bank.

Questions about a potential September rate trim have been swirling, after the central bank held rates steady in July. It had reduced interest rates in June.

"If confirmed by tomorrow's eurozone inflation data, today's German data should make the decision to cut interest rates at the September meeting a bit easier for the ECB," Carsten Brzeski, global head of macro for ING Research, said in a note Thursday.

"Fading inflationary pressure combined with fading growth momentum offer an almost perfect macro backdrop for another rate cut."

However, forward-looking inflation indicators, including wage growth and selling price expectations, suggest caution is still needed, Brzeski noted.