Higher inflation and unemployment cast shadow over Europe's biggest economy

Increases in unemployment and inflation cast a shadow over the outlook for Europe's largest economy, which joins the wider EU bloc in bracing for the full impact of newly implemented U.S. tariffs.

German inflation rose by a higher-than-expected 2.1% in August, preliminary data showed Friday, exceeding the 2% expectations of analysts polled by Reuters. Inflation, which is harmonized for comparability across the euro zone, had risen by a cooler-than-expected 1.8% in July.

Germany's core inflation, which excludes food and energy prices, was unchanged from the previous month at 2.7% in August, the country's statistics office Destatis said.

Yields on German government bonds, known as Bunds, were little changed shortly after the data release, which came on the same day that labor office figures showed the number of unemployed people jumped to 3.025 million in August, to a rate of 6.4%.

The broader euro zone inflation reading, due Tuesday, will offer further insight into the economic impact of U.S. President Donald Trump's tariff policies, which have hit various European sectors in recent months.

The U.S. and EU struck a trade agreement in July, including a 15% tariff rate on many EU goods exported to the U.S. Fresh details released earlier this month suggested that this blanket rate will also be applied to some hotly contested sectors like pharmaceuticals — but crucial questions still remain unanswered, leaving businesses on edge.

The tariffs are widely expected to drive prices higher in the U.S., but their effect on costs elsewhere is less clear.

Germany's highly export-driven economy has long been hovering near the flatline. The country's gross domestic product expanded by 0.3% in the first quarter, before contracting by 0.3% in the following period, according to the latest data from Destatis.

“It remains to be seen how European and US companies will react to US tariffs. While one scenario could see prices falling in the eurozone due to overcapacity and weaker sales in the US, globally operating companies might try to actually increase prices in Europe in order to offset profit-squeezing in the US,” said Carsten Brzeski, global head of macro at ING, in a note.

“A rather domestic theme will be the cooling of the German labour market, which should take away wage pressures and consequently inflationary pressures,” he added, noting that the inflationary hike in Germany now weakens the case for the European Central Bank to press ahead with an interest rate cut at itsSeptember meeting.

The ECB most recently opted to hold its key rate unchanged at 2% during its July meeting.