German inflation slowed more-than-expected in December, falling below 10 percent, giving the European Central Bank some relief in its struggle to control inflation.
Partly due to Berlin’s measures to protect consumers from high gas prices, the annual rate of harmonized consumer price inflation fell to 9.6 percent in December, well below the 11.3 percent recorded the previous month.
The number, released Tuesday by the country’s statistical agency, was also lower than the 10.7 percent forecast by economists polled by Portal.
Better-than-expected German numbers – after a seven-decade peak of 11.6 percent in October – follow a sharp drop in inflation in Spain and could ease pressure on the ECB, which is due to meet next on February 2 to set the interest.
Together, the German and Spanish numbers suggest euro-zone inflation could fall more than forecast when the data is released on Friday. Economists polled by Portal are forecasting that inflation in the euro zone fell to 9.7 percent in December from 10.1 percent in November.
However, most economists still expect the ECB to hike interest rates by 50 basis points in February.
Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said that while the drop in German inflation was “welcome,” it could be partly driven by subsidies. “This in turn points to stronger underlying pressures on core inflation,” he added.
Supported by German government action, the country’s annual pace of energy inflation slowed to 24.4 percent in December from 38.7 percent in November.
“Since the beginning of the war in Ukraine, energy and food prices in particular have risen noticeably and have a significant impact on the inflation rate,” said the country’s official statistics office, Destatis.
“In December 2022, however, the one-off assumption of the monthly deduction for gas and heat by the federal government had a price-lowering effect,” it said.
In contrast, services inflation accelerated to 3.9 percent from 3.6 percent in November.
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Separate data from the Federal Employment Agency, also released on Tuesday, showed that German unemployment fell by 13,000 in December, bringing the jobless rate down 0.1 percentage point to 5.5 percent.
Oliver Rakau, Germany’s chief economist at Oxford Economics, said the resilience of Germany’s labor market will “probably also underpin the ECB’s view that the [eurozone] that the recession will be superficial and that underlying price pressures remain too strong to halt a tightening for now.”
Germany’s inflation rate of 9.6 percent in December reflected so-called harmonized prices, a Europe-wide measure. Irrespective of this, the German consumer price index fell from 10 percent in November to 8.6 percent.
Franziska Palmas, senior Europe economist at Capital Economics, said she expects inflation to pick up in January when subsidies for gas and heating are phased out. However, inflation will “fall sharply from March when government gas and electricity price caps come into effect,” she added.
Additional reporting by George Steer