The inflation rate in Germany fell significantly to just 2.9 percent in January. Getty Images
Inflation in Germany fell significantly in January. The inflation rate fell from 3.7 to just 2.9 percent, the Federal Statistical Office announced 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.
The inflation rate in Germany fell significantly in January from 3.7 to just 2.9 percent. This is the smallest price increase since June 2021, the shared Federal Statistical Office in an initial estimate. The decline was surprisingly strong. Economists had expected an average inflation rate of 3.3 percent. The fact that prices are rising noticeably more slowly increases the scope for interest rate cuts by the European Central Bank (ECB).
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In 2023 as a whole, the inflation rate averaged 5.9 percent. In 2022, as a result of the Russian attack on Ukraine, inflation rose to a record 6.9 percent on average for the year. Inflation in Germany reached its peak in October 2022 at 8.8 percent. 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.
Even without the government price brakes and the increase in the CO₂ price, energy for households was almost three percent cheaper in January than a year ago. The increase in food prices slowed to 3.8 percent. The inflation rate excluding the often fluctuating prices for energy and food, also known as core inflation, is expected to be 3.4 percent.
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 purchasing power of incomes is increasing again for the first time in three years. The real interest rates on savings accounts and fixed-term deposits are already positive at some institutions.
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Economists assume that inflation in Europe’s largest economy will continue to fall. The Advisory Council for the assessment of overall economic development (economics) assumes an average inflation rate of 2.6 percent in 2024. The Ifo Institute expects 2.2 percent.
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 3.1 percent, after 3.8 percent in December. 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. It is still unclear whether the attacks by the Houthi militias in the Red Sea will lead to rising prices in Europe.
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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