Stable Inflation, Markets on Hold

Stable Inflation, Markets on Hold

Germany’s inflation steady at 2%, U.S. signals easing: rate cut prospects and ETF strategy

Germany inflation data updated today, August 13, 2025
Today, August 13 2025, Germany released its inflation data. The Consumer Price Index (CPI) year-on-year for July remained stable at 2.0%, matching both expectations and June’s level. On a monthly basis, CPI rose by about 0.3% in July.

U.S. CPI and inflation data updated yesterday, August 12, 2025
Yesterday, August 12 2025, the U.S. released its July CPI. Headline inflation rose 2.7% year-on-year, in line with or slightly below forecasts. Core inflation (excluding food & energy) increased 3.1% YoY, above expectations. Markets reacted favorably, raising expectations for a Federal Reserve rate cut in September, with 98% probability now priced in. However, some Fed officials—like Presidents Schmid and Barkin—remained cautious, suggesting data doesn’t yet justify easing.

Forecasts for interest rates: Fed and ECB

Federal Reserve

The mixed signals—a stable headline CPI paired with elevated core inflation—keep the outlook nuanced. Yet markets overwhelmingly expect a rate cut from 4.50% to 4.25% in September with about 98% probability. The decision will hinge on whether the Fed opts for a moderate 25 basis-point cut, or resists due to lingering inflation pressures.

European Central Bank (ECB)

With German inflation sitting at 2.0%, close to ECB’s target, the expectation is that ECB will hold rates steady at 2.15% at least through September’s meeting. A cut seems unlikely in the near future unless economic conditions worsen significantly.

Implications for equity markets

• U.S. equities: positive near-term sentiment driven by expected monetary easing; but high core inflation could trigger volatility.
• Europe (including Germany): inflation stability suggests neutral policy; equity markets may follow global momentum yet remain more guarded than in the U.S.

ETF Investment Strategy & Capital Protection

Key goals:

1. Benefit from potential U.S. recovery post-Fed rate cut.
2. Protect against persistent inflation (especially U.S. core).
3. Anchor in Europe for stability.

Main goals:

1. Ride the potential U.S. rebound if the Federal Reserve (Fed) cuts rates in September.
2. Protect against persistent inflation, especially “core” CPI (Consumer Price Index excluding food & energy), which remains high in the U.S.
3. Maintain a solid base in Europe, where the European Central Bank (ECB) is more cautious.

Practical strategy:

• U.S. equity ETFs (Large Cap)
  Example: an S&P 500 ETF (such as SPY) to benefit from a potential market rally if the Fed cuts rates.
  For higher risk tolerance, add sector ETFs focused on consumer and services, which may benefit from lower rates.
• Inflation-protected ETFs (TIPS)
  TIPS = Treasury Inflation-Protected Securities: U.S. bonds that adjust with inflation. Good if price pressures return.
• Defensive European ETFs
  Exposure to sectors like utilities (energy, water), consumer staples, and listed real estate (REITs = Real Estate Investment Trusts). These tend to be more stable.
• Example allocation
  60% U.S. equity ETFs, 20% TIPS ETFs, 20% defensive European ETFs.
  Adjust according to your risk tolerance and investment horizon.
• Currency protection
  If buying a U.S. ETF in USD, consider the EUR Hedged version (currency-hedged in euros).
  Example: instead of “iShares S&P 500 UCITS ETF” in USD, you could choose “iShares S&P 500 EUR Hedged UCITS ETF” to avoid EUR/USD exchange rate impact on returns.