German states are scheduled to release their CPI figures for July today. Current German inflation is slightly above 2%, which is a concern for the ECB. Headline annual inflation matches expectations at 2%, while core annual inflation is at 2.7%, despite slight moderation.
For July, the headline annual inflation is projected to decrease to 1.9%. Observers will focus on the core figure as it informs ECB’s policies before the September meeting. The market currently anticipates a ~93% probability of no change in interest rates.
Influence Of Economic Spending
Looking ahead, Germany’s inflation is monitored against the backdrop of the government’s €500 billion spending plans. This spending is not expected to immediately increase inflation, but it might enhance productivity and other economic aspects. Today’s data is unlikely to alter the ECB’s current position during the summer.
The agenda for today includes releases from several regions. These are North Rhine Westphalia, Hesse, Bavaria, Baden Wuerttemberg, and Saxony, all at 0800 GMT, followed by Germany’s national preliminary figures at 1200 GMT. The releases might not strictly adhere to the timetable, appearing slightly earlier or later.
We are watching the German state inflation numbers closely today, as they will set the tone for the national data later. With German headline inflation recently ticking up to 2.3% in June 2025, the market is hoping for a drop to the estimated 1.9% for July. However, the real focus is on the core figure, which has remained stubbornly high at 2.8% and is what the European Central Bank is truly concerned about.
Impact On Derivative Traders
For derivative traders, this creates an opportunity around volatility. If the market is too complacent, expecting the ECB to stay on hold, implied volatility on euro-related options could be underpriced. A surprise, particularly a higher-than-expected core inflation print, could cause a sharp repricing of interest rate expectations and a spike in volatility.
The market is currently pricing in a 93% chance the ECB will maintain its current 3.25% deposit rate at the September meeting. This reflects the central bank’s difficult position, as seen throughout early 2025, of balancing sticky inflation against sluggish economic growth in the bloc. A hot inflation number today could easily shift those odds and impact short-term interest rate futures.
Looking back from our vantage point in 2025, the severe inflation spike of 2022-2023 left a deep scar on ECB policymakers. This recent history makes them extremely sensitive to core inflation pressures, explaining why they are willing to risk slower economic activity to ensure inflation is fully controlled. Any sign that core prices are not cooling will reinforce their cautious stance.
Longer-term government spending plans, like Germany’s €500 billion fund, add another layer to consider for longer-dated contracts. While this spending is not expected to fuel inflation in the short term, its goal is to boost productivity. Successful implementation could change Germany’s long-term growth and inflation dynamics over the next few years.
All else being equal, the key today is not the headline number but the core inflation data. A significant deviation from expectations in the core reading will be the main trigger for market movement in the coming weeks.
