Germany experienced a continued rise in consumer price inflation for the third consecutive month in December, reaching its highest level in 11 months. This increase was primarily driven by elevated food prices and higher service costs. Despite this spike in inflation, European Central Bank (ECB) policymakers are unlikely to be overly concerned and are expected to proceed with another interest rate reduction in their upcoming policy session later this month.
According to preliminary data from Destatis, the consumer price index rose by 2.6% year-on-year in December, compared to a 2.2% increase in November. Economists had anticipated a 2.4% inflation rate. Core inflation, which excludes food and energy prices, edged up to 3.1% from 3.0%.
Service sector inflation increased to 4.1% from 4.0%, while food prices grew by 2.0%, up from 1.8%. Meanwhile, the decline in energy prices slowed to 1.7% from the previous 3.7% decrease.
Carsten Brzeski, an economist at ING, noted, "Looking forward, it seems that inflation will remain slightly above comfortable levels, as favorable energy base effects continue to wane while wages rise."
On a monthly basis, prices increased by 0.4% in December, rebounding from a 0.2% decline in November. Economists had predicted a 0.3% rise.
The harmonized index of consumer prices (HICP), a measure aligned with EU standards, increased by 2.9% year-on-year after a 2.4% rise in November, surpassing the expected 2.6% acceleration.
Month-on-month, the EU's inflation measure climbed by 0.7%, offsetting a similar decline from the previous month. The expected increase was 0.5%.
The average annual inflation for 2024 was recorded at 2.2%, a significant decrease from the 5.9% seen in 2023, marking the lowest level since 2020 when it stood at 0.5%.
Economists suggest that the ECB will likely overlook this anticipated rise in inflation as it is expected to subside in the coming months. Moreover, Eurozone interest rates remain in a restrictive zone and need to be lowered to stimulate a sluggish economy.
“While previous experiences of delayed responses to rising inflation may prevent the ECB from implementing ultra-low rates, the urgency to pre-emptively adjust interest rates to a neutral stance remains strong,” added Brzeski.
ING forecasts that German inflation will eventually stabilize within a range of 2-2.5% over the year.
Brzeski also highlighted that available data suggests the possibility of stagflation reemerging in the eurozone. This scenario might worsen if trade tensions rise, posing further challenges for the ECB and potentially deepening the divide between policy hawks and doves.
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