Germany: Inflation fell sharply in December to 8.6% for the year

Inflation in Germany peaked in December thanks to state aid for gas, but remains high, heralding a long “marathon” to keep prices down, economists say.

The press release of Destatis statistical institute states that the growth of the price index reached 8.6% within a year and lost 1.4 points compared to November.

The drop, more significant than analysts had expected, pushed inflation in Europe’s biggest economy below 10% for the first time since August.

In all of 2022, marked by rising energy costs following the Russian war in Ukraine, inflation reached 7.9%, the highest since the birth of Federal Germany after World War II.

The previous record was 7.6% in 1951, the Destatis Institute told AFP.

In a country where wheelbarrows full of banknotes were used to buy bread in 1923, the height of hyperinflation during the Weimar Republic 100 years ago, inflation remains a lasting trauma.

It is hoped that the recent peak of 10.4% achieved in October will recede permanently.

The advance of Germany’s adjusted consumer price index (HICP), which is used as a benchmark by the European Central Bank (ECB), also fell to 9.6% in December against 11.3% year-on-year.

The main issue of 2023 is ___

According to Destatis, this development is the result of calmness in fuel and gas prices and a one-time government subsidy for gas users.

Mild temperatures have also slowed demand, while gas supplies remain plentiful, with the country’s tanks more than 90% full and direct deliveries of liquefied natural gas (LNG) to German territory for the first time.

LBBW economist Jens-Oliver Niklasch said that although December’s inflation level has given some respite, prices “remain unacceptably high”, especially in the food (+20.7%) and energy (+24.4%) sectors.

At current levels, “inflation will remain a major concern in 2023,” says ING economist Carsten Brzeski.

The Bundesbank expects a slight decline in the indicator to only around 7% this year.

Fritzi Köhler-Geib, Chief Economist of the Public Bank, notes that “the European Central Bank (ECB), which has been experiencing aggressive interest rate hikes since July, would be wrong if it tried to end the monetary tightening policy prematurely.” KfW.

Continuous energy shock ___

The ECB slowed the pace of interest rate hikes in December, but also signaled its determination to keep moving to tackle desperately high inflation.

The president of the monetary institution, Christine Lagarde, said that the energy shock did not end with raising prices.

In Germany, as elsewhere, there are “good reasons to believe” that inflation will be higher in January and February.

Because many companies will transfer additional energy costs to sales prices during this period.

Economists at Capital Economics believe that German inflation should still fall significantly from March, when the government will fully implement its price protection on gas and electricity prices.

Looking ahead, the inflation figures for December “are not a relief, but simply a reminder that inflation in the euro area is still largely an energy price phenomenon,” comments Mr Brzeski.

The economist predicts that this is why the ECB should raise interest rates by just one percentage point at its next two meetings, in February and March.

In Germany, where the fight against inflation remains a “marathon, not a sprint,” government subsidies “cannot be a permanent response to price pressures,” according to Mr. Niklash.

This article was automatically published. Sources: ats / awp / afp

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