Bavaria’s Consumer Price Index (CPI) for August has increased to 2.1%, up from 1.9% a year ago, according to data from Destatis released on August 29, 2025. Other German states saw similar rises: North Rhine Westphalia’s CPI is now 2.0%, up from 1.8%; Saxony’s CPI has risen to 2.2% from 1.9%; and Baden Wuerttemberg’s CPI has gone up to 2.5% from 2.3%. Overall, these numbers indicate rising price pressures across these areas in August. The national CPI is expected to be around 2.2%, slightly higher than the previous estimate of 2.1%.

Inflation Expectations Adjustments

The inflation rates in German states are coming in higher than expected, which may lead to national and Eurozone figures also surprising on the upside. As a result, we’re adjusting our expectations for the European Central Bank (ECB) for the rest of the year. This change is crucial for our strategy in the coming weeks. This data complicates the outlook for the ECB, which has kept the deposit rate steady at 3.50% for the past five months. Just recently, market expectations were indicating a 40% chance of a rate cut by early 2026. Following today’s figures, that likelihood has fallen to below 15%. Given this, we may want to consider shorting front-month interest rate futures, such as the December 2025 Euribor contract, to bet on higher short-term rates. Reflecting on the ECB’s aggressive rate hikes that began in July 2022, we saw how quickly the market adjusted when inflation proved to be persistent. This period benefited those who recognized that the central bank was lagging behind.

Impact on German Bonds

As a result, pressure is increasing on German government bonds. Buying put options on Bund futures is a smart strategy to prepare for decreasing bond prices as yields rise. The 2-year German yield, an important indicator of ECB policy expectations, has already surged 10 basis points to 3.18% this morning due to these inflation reports. A more hawkish ECB will also support the Euro, which may lead to a rise in implied volatility in EUR/USD options from its current lows. Remember that core inflation remained stubbornly above 5% for much of 2023, and any indication of that “stickiness” returning will concern the ECB. This creates a chance in currency derivatives for those looking to profit from larger future exchange rate fluctuations. Create your live VT Markets account and start trading now.

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