Today’s inflation data from North Rhine-Westphalia, the largest region in Germany, shows a notable softening in inflation, with headline inflation slightly declining by -0.1% month-over-month and core inflation showing a modest increase of 0.08% MoM. When adjusted seasonally, the core inflation rate stands at approximately 0.11% MoM, marking one of the softest readings this year, apart from April.

The detailed data indicates that inflation in essential sectors such as housing, water, and electricity remains very low, as does inflation in the food sector. There are minor exceptions in sectors like education and hospitality, including restaurants and cafes, which haven’t experienced as significant a softening.

Moreover, the Ifo employment barometer has continued to fall, dampening earlier hopes for a return to pre-2016 employment levels by 2024. This trend suggests that employment could significantly influence wages and exert disinflationary pressure into late 2024 and early 2025. With no immediate risk of a wage-price spiral, ECB President Christine Lagarde may need to pivot her focus from price stability to employment, a shift in policy focus similar to that seen in recent actions by the Fed under Jerome Powell.

Finally, on Spanish inflation, which was also released earlier. The latest inflation data from Spain reveals a subdued headline inflation rate, which remains unchanged at 0% both before and after seasonal adjustments. Core remains a tad more sticky, but the trend remains intact towards softness.

This will be perceived as another green light for central banks to stop caring about inflation and start caring about growth- and labour markets instead.

Based on the composition of the German regional data that has already been released, it is possible to make an informed estimate about the upcoming nationwide figures. The regional data suggests a decent deviation from expectations, which might translate to a soft surprise of around 12-13 basis points.

However, despite this variation, it is improbable that the month-over-month (MoM) nationwide change will reach a decline of -0.2% when rounded (see chart 1d)

Chart 1.a: Subdued headline print in Spain