German inflation slowed more than expected in December, sliding into single digits for the first time since the summer and providing some relief for the European Central Bank in its battle to control price rises.
Consumer price inflation dropped to 9.6 per cent in the year to December, well down on the 11.3 per cent registered the previous month, after Berlin implemented measures to shield consumers from high gas prices.
The figure, published by the country’s federal statistical agency on Tuesday, was also lower than the 10.7 per cent forecast by economists polled by Reuters.
The euro zone’s largest economy is the latest country to experience a sharper than expected drop in price pressures. The German number — down from a seven-decade peak of 11.6 per cent in October — follows a sharp fall in inflation in Spain and may ease pressure on the ECB, which will next meet to set rates on February 2nd.
Together, the German and Spanish figures suggest that euro-zone inflation could drop lower than the 9.7 per cent forecast by economists when data is published on Friday.
Robin Brooks, chief economist at the Institute of International Finance, a trade body for global finance, said the fall meant that “the peak of ECB hawkishness is behind us”.
The euro traded 0.9 per cent lower against the dollar on the day, at $1.056.
“Headline inflation in Germany seems to have reached its peak and, unless there is another large surge in energy prices, double-digit inflation numbers should be behind us for a long while,” said Carsten Brzeski, an economist at ING Bank.
However, others cautioned that the nature of the slowdown — in large part driven by the government’s gas price brake —meant the ECB remained likely to raise rates by 50 basis points in February.
A look ahead to 2023
Energy inflation, which soared after Russia’s invasion of Ukraine, slowed to 24.4 per cent in December from 38.7 per cent in the previous month and well below a peak of 43.9 per cent in September, reflecting the government subsidies. Meanwhile, services inflation — a better measure of underlying price pressures — accelerated to 3.9 per cent from 3.6 per cent in November.
Claus Vistesen, chief euro zone economist at Pantheon Macroeconomics, said the services inflation figure was “unpleasant” and would embolden rate-setters to continue on the hawkish path set out in the December meeting. Vistesen warned that, by boosting demand, the government subsidies risked stoking underlying inflation.
Germany’s 9.6 per cent figure for December inflation reflected so-called harmonised prices, a pan-European measure. Separately, the German consumer price index reading came in lower at 8.6 per cent, down from 10 per cent in November.
Franziska Palmas, senior Europe economist at Capital Economics, said she expected German inflation to rise in January, when gas and heating subsidies end. “Headline inflation is still likely to decline rapidly in March, but we think the core rate, which probably rose in December, will end the year well above 2 per cent,” she added.
Separate data from the Federal Labour Office, also out on Tuesday, showed that German unemployment fell by 13,000 in December, taking the jobless rate to 5.5 per cent.
Oliver Rakau, chief German economist at Oxford Economics, said the robustness of the German labour market would also “likely bolster the ECB’s view that the [euro zone] recession is set to be shallow and that underlying price pressures remain too strong to stop tightening for now”. — Copyright The Financial Times Limited 2023
