By Ed Frankl
German inflation fell in January to its lowest level since June 2021, dragged down by falling energy prices, likely leading to further calls for the European Central Bank to start cutting rates sooner.
Consumer prices were 2.9% higher in January than the same month a year earlier, compared with 3.7% in December, measured by national standards, data from the German statistics office Destatis showed Wednesday. This matched expectations of a consensus of economists polled by The Wall Street Journal.
The lower rate was driven by energy prices, which were 2.8% lower than at the same point a year ago, despite the introduction of a new carbon tax, Destatis said. In December, inflation had rebounded thanks in part to resurgent energy costs.
Meanwhile, food prices slowed to an inflation rate of 3.8%, compared with 4.5% in December, while goods inflation ticked down to 2.3% from 4.1% last month. Services inflation, however, rose to 3.4% in January from 3.2%.
The core inflation rate, which excludes volatile food and energy prices and is more representative of underlying inflationary trends, ticked down to 3.4% in January from 3.5% in December, according to Destatis.
German inflation is a significant contributor to eurozone data, which is due to be released at 1000 GMT on Thursday. On an EU-harmonized basis, German inflation ticked down by more than the national rate, to 3.1% from 3.8% in December, lower than consensus expectations of 3.4%.
That could lead to more prominent calls for the European Central Bank to cut rates. Money markets are currently pricing in a first rate cut in April, although the bank's President Christine Lagarde said at last week's monetary-policy meeting that it was premature for policymakers to be discussing cuts.
In other data released this week, French inflation ticked down to 3.4%, but Spanish inflation unexpectedly rose to 3.5%.
Also affecting the bank's decision-making may be clear signs of a slowdown in the eurozone's biggest economy. German GDP declined 0.3% in the final quarter of the year, with high interest rates among the burdens on economic growth, alongside low demand for Germany's key manufactured goods.
And while services inflation edged up, the fall in core inflation will be welcomed by those arguing that the ECB should begin rate cuts sooner rather than later, said Andrew Kenningham, chief Europe economist at Capital Economics, in a research note.
"There's still one more inflation release to take into account before the ECB's March meeting but the numbers for January make us more confident in our forecast that the first rate cut will be in April," he added.
Write to Ed Frankl at edward.frankl@wsj.com
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German inflation climbed in December, a result of an expected rebound in energy costs, matching expectations of economists as markets consider whether the recent trend of cooling prices will be enough for the European Central Bank to signal cuts to interest rates.
Consumer prices in Europe's largest economy were 3.7% higher in December 2023 than the same month a year earlier, compared with 3.2% in November, measured by national standards, preliminary data from the German statistics office Destatis showed Thursday.
German inflation had fallen five months in a row until November, but the renewed rise in December came as no surprise: it matched expectations of a consensus of economists polled by The Wall Street Journal.
The increase was driven by energy prices, which jumped 4.1% on year, flipping the 4.5% decline in November, largely a result of base effects from government assistance that cushioned gas and heating bills introduced late in 2022. Energy prices dived 10% on month in December 2022 as a result of the measures.
Food prices eased, however, rising 4.5% on year in December, from 5.5% in November, Destatis said. But goods inflation was higher, at 4.1% in December, from 3.0% the prior month.
Core inflation, which excludes volatile food and energy prices, ticked down to 3.5% in December from 3.8% in November, according to Destatis.
German inflation is a significant contributor to eurozone data, which is due to be released at 1000 GMT on Friday. On an EU-harmonized basis, German inflation climbed to 3.8% from 2.3% in November, a little lower the consensus expectation of 3.9%. Elsewhere, Spanish inflation stagnated at 3.3% and French inflation ticked up to 4.1%.
The ECB fears that if inflation remains too high for too long, inflation expectations in money markets could increase, leading to a wage-price spiral and pressure on prices to rise. The central bank held rates at its last meeting in December.
However, with core inflation continuing to trend down, it shouldn't affect expectations for the ECB to begin cutting interest rates in the coming months, Capital Economics' chief Europe economist Andrew Kenningham said in a research note.
Focusing on the core rate, he added: "The surge in inflation in Germany that began in 2021 has, to all intents and purposes, ended."
(END) Dow Jones Newswires
01-31-24 0904ET
