Germany’s Inflation and Economic Outlook

By Maria Martinez

BERLIN (Reuters) – Germany’s annual inflation rate held steady in January but core inflation eased markedly, maintaining expectations of further interest rate cuts from the European Central Bank.

German inflation remained at 2.8% this month, in line with forecasts, preliminary data showed on Friday.
Core inflation, which excludes volatile food and energy prices, eased to 2.9% in January from 3.3% in December.

Germany will hold a snap national election on Feb. 23 following the collapse of Chancellor Olaf Scholz’s three-way coalition.

“The persistently weak economy appears to be having an increasingly disinflationary effect,” said Sebastian Becker, economist at Deutsche Bank Research, adding that he expects the core rate will fall further during the year.

Increasing competition from abroad, high energy costs, still elevated interest rates, and uncertain economic prospects have significantly affected Germany’s economy, which contracted in 2024 for the second consecutive year.

The weakness of Europe’s biggest economy has impacted the labour market, raising the unemployment rate to 6.2% – the highest in over four years.

Andrew Kenningham, chief Europe economist at Capital Economics, noted that regional and national data suggested euro zone inflation – due on Monday – may come in a bit lower than anticipated.
“This would support those on the European Central Bank Governing Council arguing for significantly more policy easing in the coming months,” Kenningham said.

French consumer prices increased slightly less than expected in January, preliminary data showed, with the harmonised rate at 1.8%.
Economists polled by Reuters expect Monday’s data to show euro zone inflation held at 2.4% in January, unchanged from the previous month.

The ECB cut interest rates on Thursday and kept the door open for another reduction in March as concerns over lacklustre economic growth outweigh inflation worries.
Markets are anticipating three further rate cuts in the euro zone this year.

However, separate surveys on Friday indicated that euro zone consumers and economists’ inflation expectations for this year increased, raising doubts about the ECB’s assertion that price growth is firmly under control.
In Germany, a survey from the Ifo institute on Friday indicated fewer manufacturers plan to raise their prices, but more consumer-related service providers intend to do so.

“The inflation rate is therefore expected to be around 2.5% in the coming months, hence above the ECB’s target,” stated Timo Wollmershaeuser, head of forecasts at Ifo.

The persistence of inflation at slightly too high a level seems set to continue as favorable energy base effects diminish, said Carsten Brzeski, global head of macro at ING.
“We might not agree with the entire macro assessment the ECB provided yesterday but, particularly for Germany, a scenario of inflation settling down in the range of 2% to 2.5% over the year seems realistic,” Brzeski added.