German Inflation Slows Sharply on Renewed Fuel-Tax Relief

German inflation slowed more than expected in October after the government revived a temporary fuel-tax cut from earlier in the year.

Consumer prices rose an annual 2.8% in October, down from 3.3% the previous month. That’s below the 3.1% median estimate in a Bloomberg survey and readings in France, Italy and Spain.

The data arrive ahead of a report for the 21-nation euro zone on Wednesday, which economists predict will show inflation reaching 3.9%, nearly twice the European Central Bank’s target.

Policymakers discussed the risk that price pressures are broadening at this week’s interest-rate meeting, also debating whether a hike was currently warranted. Ultimately, they opted to hold fire and collect more information before their final gathering of 2026, in December.

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A third quarter-point move at that point will probably be needed unless the outlook improves, according to people familiar with the situation. Such a step would take the deposit rate to 2.75%, a level that may weigh slightly on demand.

President Christine Lagarde said Thursday that the ECB doesn’t see a “material risk” of second-round inflation effects at the moment, but conceded that they’re more likely to emerge the longer energy prices stay elevated.

Bundesbank President Joachim Nagel told Bloomberg that prices may continue to rise in the coming weeks, with higher energy costs being a major contributor.

Oil has jumped since the start of September, while natural gas has hit its highest level in almost four years.

Consumers have most acutely felt the impact via higher prices at the pump. Across Germany’s 16 federal states, fuel prices are still about 30% higher than a year ago, even with the tax rebate restored.

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Just like in May and June, excise duty on gasoline and diesel is currently reduced by 14 cents a liter, equal to about 17 cents of relief once value-added tax is included. The measure is part of a €2.5 billion ($2.8 billion) package Chancellor Friedrich Merz’s government agreed on in September.

In Italy, the government tapered a fuel-tax discount in October, with inflation accelerating significantly more than economists expected as a result to reach 5.6%, the highest level in more than three years. The median estimate was for more modest pickup to 4.6%.

Inflation also surprised on the upside in France, where it reached 3.8%. It eased to 4.9% in Spain.