German Inflation Unexpectedly Eases In January

(RTTNews) - Consumer price pressures in Germany slowed unexpected at the start of the year amid a sharp slowdown in food inflation, offering some relief for the European Central Bank that lowered interest rates a day earlier and plans to continue easing to boost the single currency economy that came to a standstill in the final three months of 2024. The consumer price index rose 2.3 percent year-on-year in January following a 2.6 percent increase in December, preliminary estimates from the statistical office Destatis showed on Friday. Economists had expected the inflation rate to remain unchanged after accelerating in the previous three months.

Inflation based on the harmonized index of consumer prices was unchanged at 2.8 percent in January, as expected.

Core inflation that excludes prices of food and energy slowed to 2.9 percent from 3.3 percent. That was the lowest since October when it was at the same level.

Goods price growth slowed to 0.9 percent from 1.4 percent led by a sharp easing in food inflation to 0.8 percent from 2.0 percent. Energy prices fell 1.6 percent, the same as in the previous month.

The slowdown in services inflation was relatively modest, down to 4.0 percent from 4.1 percent. The CPI decreased 0.2 percent month-on-month following a 0.5 percent increase in December. The measure was expected to edge up 0.1 percent. The HICP fell 0.2 percent on a monthly basis, in line with expectations, after a 0.7 percent rise in the previous month.

Commerzbank economist Vincent Stamer described the decline in the inflation rate as "particularly surprising" as fuel prices rose sharply at the turn of the year and one-off effects such as higher prices for the Deutschland-Ticket, a monthly flat rate public transport ticket, and insurances occur in January. The easing in core inflation was all the more significant, the economist added.

That said, the continued high wage inflation also suggests that the inflation problem has not yet been solved, Stamer pointed out. Further, the unchanged HICP inflation is a decisive factor for the ECB and inflation is unlikely to have fallen in the euro area as a whole going by the preliminary data released from some key economies including France and Spain.

"This is another reason why the ECB target of 2 percent is unlikely to be reached in the spring," Stamer said.

Disinflation is well on track and inflation is set to return to the target in the course of the year, the ECB said on Thursday as it lowered interest rates for a fourth policy session in a row. The bank is widely expected to continue rate reductions as policymakers seek a neutral rate and, in a bid to boost the sluggish Eurozone economy. "All in all, as long as the eurozone can avoid a more stagflationary scenario, the ECB can continue cutting rates far into neutral territory or even below, in case eurozone growth persistently disappoints," ING economist Carsten Brzeski said.

The stickiness of inflation in Germany at slightly too high a level still looks set to continue as favorable energy base effects continue to peter out, Brzeski added. The economist also said that the increase in unemployment damps hopes of a consumption revival but bodes well for more disinflationary pressures later this year.

Elsewhere on Friday, results of a monthly ECB survey showed inflation expectations rising among households in the euro area and a quarterly report from the bank revealed forecasters raising yearly projections for price growth.