By Maria Martinez
BERLIN (Reuters) -Germany’s annual inflation rate held steady in January but core inflation eased markedly, keeping intact 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 taken a heavy toll on Germany’s economy, which contracted in 2024 for the second year in a row.
The weakness of Europe’s biggest economy took its toll on the labour market, with the unemployment rate rising to 6.2% – the highest in more than four years.
Andrew Kenningham, chief Europe economist at Capital Economics, said regional and national data published so far 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 anticipated in January, preliminary data showed on Friday, with the harmonised rate at 1.8%.
Economists polled by Reuters expect data on Monday 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 a further reduction in March as concerns over lacklustre economic growth trump worries about inflation.
Markets are pricing in three further rate cuts in the euro zone this year.
However, separate surveys on Friday showed euro zone consumers and economists’ inflation expectations for this year had increased, raising some 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 want to raise theirs.
“The inflation rate is therefore also expected to be at around 2.5% in the coming months, hence above the ECB’s target,” said Timo Wollmershaeuser, head of forecasts at Ifo.
The stickiness of inflation at slightly too high a level still looks set to continue as favourable energy base effects continue to peter out, Carsten Brzeski, global head of macro at ING said.
“We might not agree with the entire macro assessment the ECB gave yesterday but, at least for Germany, a scenario of inflation settling down in the range of 2% to 2.5% over the course of the year seems realistic,” said Carsten Brzeski, global head of macro at ING.
(Reporting by Maria Martinez, Editing by Kevin Liffey, Christina Fincher and David Evans)
