German Inflation At 11-Month High Unlikely To Worry ECB Policymakers

(RTTNews) - Consumer price inflation in Germany rose for a third month in a row, and at a faster than expected pace in December, to its highest level in 11 months led by higher food prices and services costs, though policymakers at the European Central Bank are likely to be less concerned at the recent spike in price pressures and press ahead with another interest rate reduction in the next policy session due at the end of the month. The consumer price index rose 2.6 percent year-on-year following a 2.2 percent increase in November, preliminary figures from the statistical office Destatis showed on Monday. Economists had forecast a 2.4 percent inflation.

Core inflation that strips out prices of food and energy climbed to 3.1 percent from 3.0 percent.

Services inflation rose to 4.1 percent from 4.0 percent and food price growth increased to 2.0 percent from 1.8 percent. The pace of decline in energy prices slowed to 1.7 percent from 3.7 percent.

"Looking ahead, the stickiness of inflation at slightly too high a level still looks set to continue as favorable energy base effects will continue to peter out while wages are increasing," ING economist Carsten Brzeski said.

Prices rose 0.4 percent from November when they fell 0.2 percent. Economists had forecast a 0.3 percent increase.

The harmonized index of consumer prices, or HICP, rose 2.9 percent year-on-year after a 2.4 percent increase in the previous month. The rate was expected to accelerate to 2.6 percent.

The EU measure of inflation rose 0.7 percent month-on-month, entirely reversing the similar size decline in the previous month. The measure was expected to increase 0.5 percent.

The annual average inflation for 2024 was 2.2 percent, which was much less than the 5.9 percent logged in 2023. Inflation was the lowest since 2020, when it was 0.5 percent.

Economists said the ECB is likely to look through the expected surge in inflation as it is forecast to diminish in coming months. Further, Eurozone interest rates remain in the restrictive territory, and they need to be lowered to boost a sluggish economy.

"While the experience of being slow to address rising inflation will deter the ECB from adopting ultra-low rates, the desire to stay ahead of the curve remains a compelling reason to return interest rates to neutral as swiftly as possible," the economist added.

ING expects German inflation to eventually settle down in a range of 2-2.5 percent over the course of the year.

Brzeski also pointed out that available data thus far suggest that the specter of stagflation is back in the eurozone. A scenario, the economist said, could actually get worse if trade tensions escalate, and a complication for the ECB which could further widen the current divergence between hawks and doves.