German Inflation Lowest Since June 2021

(RTTNews) - Germany's consumer price inflation eased further in February to its lowest level in over two-and-a-half years, while core inflation remained unchanged validating the European Central Bank's view that it is too early to think of cutting interest rates.

The consumer price index, or CPI, rose 2.5 percent year-on-year following a 2.9 percent increase in January, preliminary estimates from the statistical office Destatis showed Thursday. Economists had forecast 2.6 percent inflation. The headline inflation rate was the lowest since June 2021, when it was 2.4 percent.

However, core inflation that excludes prices of food and energy was unchanged at 3.4 percent, which is well above the ECB's 2 percent target.

"Underlying inflation illustrates just how difficult the last mile will be for the ECB and clearly argues against cutting rates too early," ING economist Carsten Brzeski said.

"As a result, the ECB will want to wait to be entirely sure of what the trend of both headline and underlying inflation will be."

Wage developments remain key and as long as the economy doesn't fall off a cliff, the ECB will sit tight, waiting for more data, Brzeski added.

Prices grew 0.4 percent from the previous month, which was double the pace in January. Economists had expected a 0.5 percent gain. Inflation, based on the harmonized index of consumer prices or HICP, slowed to 2.7 percent from 3.1 percent. The monthly rate rose to 0.6 percent from -0.2 percent in January. Both were in line with expectations.

Services inflation was steady at 3.4 percent, while the increase in the goods prices slowed to 1.8 percent from 2.3 percent. Energy prices declined for a second month in a row, down 2.4 percent. The decrease came despite the discontinuation of the brake on energy prices and the introduction of a higher carbon price from January this year, which affects the price of fossil fuels such as motor fuels, heating oil and natural gas, Destatis said.

Food price inflation slowed sharply to 0.9 percent from 3.8 percent and was lower than the overall inflation rate for the first time since November 2021. Commerzbank economist Ralph Solveen said there are increasing signs that the downward trend in the German inflation rate will soon come to an end. "Energy prices are likely to be slightly higher again in the coming months than in the same month of the previous year, partly due to the renewed increase in VAT on gas and higher grid charges for electricity," the economist said.

"The rate of inflation for other goods may still fall slightly, but the inflation rate for services is likely to move sideways and ultimately be decisive in stabilizing the core inflation rate well above the ECB's 2 percent target."