3 months ago • 2 mins
What’s going on here?
German and Spanish inflation came in much lower than expected.
What does this mean?
Usually the go-getter of Europe, Germany’s economy has been sagging under the weight of inflation. It bodes well, then, that German inflation fell to a much-lower-than-expected 2.3% in November, the lowest since 2021. Spain’s figure caught investors off guard too, dipping for the first time since June to land below expectations at 3.2%. With any luck, that’ll set the tone for overall European inflation figures this Thursday. There’s just one snag. Those dips are mainly down to falling energy prices: core inflation – which ditches food and energy prices – is still 3.8% in Germany and 4.5% in Spain. And because energy’s been getting cheaper for a year now, the difference will look less dramatic when comparing months to the same time the year before. So unless other prices start falling, inflation could tick higher again.
Why should I care?
For markets: On your marks, markets.
Central banks won’t cut economy-squashing interest rates until they’re sure that inflation’s been beaten into submission, but data like that could be the start of the trend they’re looking for. That’s why whispers of rate cuts have started swirling, and that might be why the S&P 500 is on track for its fourth-best month in nearly three decades. Remember: falling inflation and interest rates make companies’ future cash flows – what investors value stocks on – look better when discounted back to today’s worth.
The bigger picture: Put the champagne on ice.
Not to be outdone, the US issued a pleasant surprise on Wednesday. The stateside economy strengthened by a higher-than-expected 5.2% last quarter, while the Federal Reserve’s preferred inflation measure was pulled down slightly. Now, interest rates are known for throwing out nasty surprises with a lag, but that aside, the data suggested the central bank might’ve managed to calm inflation without sacrificing the economy completely.
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