German inflation falls to 9.6%

German inflation slowed more than expected in December, slipping below 10% and providing some relief to the European Central Bank in its fight to control prices.

Due in part to Berlin’s measures to protect consumers from high gasoline prices, the annual rate of consumer price inflation slowed to 9.6% in December, a sharp drop from the 11.3% recorded. received in the previous month.

The figure released by the country’s federal statistics agency on Tuesday was also lower than the 10.7% forecast by economists polled by Reuters.

Line chart of year-over-year % change on the harmonized consumer price index shows slower-than-expected German inflation

Germany’s better-than-expected numbers – down from a seven-decade high of 11.6% in October – follow a sharp drop in inflation in Spain and should be able to ease pressure on the ECB, meeting next to set the interest rate on February 2nd.

German and Spanish figures suggest euro zone inflation could fall more than forecast when data is released on Friday. Economists polled by Reuters forecast eurozone inflation to fall to 9.7% in December, down from 10.1 percent in November.

However, most economists still expect the ECB to raise its benchmark interest rate by 50 basis points in February.

Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said that while the drop in inflation in Germany was “welcome”, it could be fueled in part by subsidies. “This again points to stronger underlying pressures on core inflation,” he said.

Aided by German government measures, the country’s annual rate of energy inflation slowed to 24.4% in December from 38.7% in November.

“Since the beginning of the war in Ukraine, the prices of energy and food in particular have increased significantly and have had a significant impact on the inflation rate,” said Destatis, the country’s official statistics agency. .

“However, in December 2022, the one-time assumption of the federal government deducting monthly gas and heat bills had the effect of driving down prices,” it added.

By contrast, services inflation increased to 3.9% from 3.6% in November.

Separate data from the Federal Labor Office, also released on Tuesday, showed Germany’s unemployment rate fell by 13,000 in December, lowering the unemployment rate 0.1 percentage point to 5.5%. .

Oliver Rakau, chief German economist at Oxford Economics, said the strength of the German labor market would also “probably reinforce the ECB’s view that [eurozone] The recession is set to be shallow and underlying price pressures are still too strong to stop tightening now.

Franziska Palmas, senior Europe economist at Capital Economics, said she expected German headline inflation to pick up in January when the heating and gas subsidies end. However, inflation “will fall sharply from March onwards, when government electricity and gas prices come into effect,” she added.

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