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Inflation rate falls to 2.5 percent – ​​price stability is in sight

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Inflation rate falls to 2.5 percent – ​​price stability is in sight

Inflation under control: Prices in Germany only rose by 2.5 percent in February compared to the previous year. Getty Images

Inflation in Germany fell to just 2.5 percent in February. The Federal Statistical Office announced this in an initial estimate.

This is the lowest price inflation since June 2021, i.e. in 30 months.

Inflation is thus approaching the ECB’s stability target of two percent. Interest rate cuts are getting closer.

Inflation in Germany fell further from 2.9 percent to just 2.5 in February. This is the smallest price increase since June 2021, the shared Federal Statistical Office in an initial estimate. The decline was somewhat greater than expected. Economists had expected an average inflation rate of 2.6 percent. The fact that prices are now rising noticeably more slowly increases the scope for interest rate cuts by the European Central Bank (ECB). Deutsche Bank even expects the inflation rate to fall below two percent in the summer, the ECB’s stability goal.

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In 2023 as a whole, the inflation rate averaged 5.9 percent. Inflation in Germany reached its peak at 8.8 percent in October 2022 as a result of the Russian attack on Ukraine. Since then it has been slowly but steadily declining.

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Rising prices reduce the purchasing power of incomes. In doing so, they depress consumption and slow down the economy. Inflation also affects people with low incomes and few assets more than wealthy people. If inflation declines, that will be good for consumers and the economy. In 2023, incomes will have risen faster than prices for the first time in four years. According to economists, consumer purchasing power should increase significantly in 2024. The real interest rates on savings accounts and fixed-term deposits are already positive at some institutions.

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Inflation is currently also being depressed by the fact that energy is usually cheaper than it was a year ago. The inflation rate is always given as a year-on-year comparison. Two other figures show that there is still price pressure. Compared to the previous month of January, consumer prices rose by a strong 0.4 percent. And if you exclude the prices for energy and food, the core rate of inflation rose unchanged by 3.4 percent year-on-year.

The European Central Bank (ECB) aims for an inflation rate of two percent as a goal for price stability. In order to achieve this goal, it had significantly increased interest rates in the euro area ten times in a row since the summer of 2022. The interest rate at which banks can borrow money from the central bank is currently 4.5 percent. If financial institutions park money with the ECB, they receive 4.0 percent interest on these deposits.

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2024 could now be a year of change: prices are rising more slowly and the ECB is likely to cut interest rates over the course of the year. The ECB’s next interest rate decision is due on March 6th. Analysts mostly do not expect a rate cut until April at the earliest.

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Economists assume that inflation in Europe’s largest economy will continue to fall. The Ifo Institute and Deutsche Bank expect inflation to average 2.2 percent for the year.

In addition to the national inflation rate, the statisticians determine the harmonized consumer price index (HICP) using a uniform system for the countries in the euro zone. The HICP is also crucial for the ECB’s interest rate decisions. In January, the HICP for Germany rose by 2.7 percent after 3.1 percent in January. The Bundesbank expects the HICP to also fall in 2024 and will average 2.7 percent.

Two risks for inflation in Germany

There are currently two main risks for prices. The first concerns the wars in Ukraine and the Middle East. If one of the conflicts expands, there could be new bottlenecks and rising prices, especially for oil and gas. Russia still supplies large quantities of gas to Europe and is a major oil exporter to the global market.

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The second risk concerns rising wages and salaries. Unions have recently pushed through high collective bargaining agreements and are currently on strike for shorter working hours with full pay. The shortage of skilled workers strengthens the negotiating position of many employees. Even double-digit tariff demands are not uncommon. There are still risks of inflation, warns Ifo President Clemens Fuest: “These are primarily the currently sharp rise in wages, which are leading to higher prices, especially for services.”

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