German state inflation drops, national data due Friday

Inflation rates in major German states dropped in October, preliminary data released on Friday indicated. The decline suggests the national figure for the euro zone's largest economy may also fall this month, despite ongoing pressure from energy costs.

State statistics show sharp declines in several regions. Bavaria’s rate fell to 2.8% from 3.2% in September. North Rhine-Westphalia dropped to 2.7% from 3.3%, and Lower Saxony decreased to 2.9% from 3.3%. Baden-Wuerttemberg recorded a 0.3 percentage point drop to 2.6%. Saxony’s rate remained steady at 2.8%.

The German government currently projects the national annual inflation rate will hit 2.7% this year and rise to 3.0% in 2027. However, the war in Iran has driven up energy prices in recent months, creating headwinds for the economy. Officials cited these rising costs as a key factor in recent inflation trends.

Economists surveyed by Reuters forecast the harmonised national inflation rate for October at 3.1%, down from 3.3% in September. Official national figures are scheduled for release later Friday. These data point to a potential easing of price pressures before the broader European context is revealed.

The European Central Bank left interest rates unchanged on Thursday. The bank signaled a potential rate hike in December, warning that high and rising energy costs are fuelling inflation risks across the bloc. Euro zone inflation is expected to reach 3.9% in October, slightly above the 3.8% recorded in September, according to the same Reuters poll.

The German state data provides an early signal for the national release. While individual states show improvement, the national figure is expected to remain elevated due to energy sector dynamics. The outcome of Friday's release will inform market expectations for the December monetary policy decision.