Germany: Base effect pushes up inflation in December
Harmonized inflation increased to 3.8% in December, up from November’s 2.3% but slightly lower than the market had been expecting. The acceleration was largely due a low base of comparison created by the one-off state subsidies for energy bills introduced in late 2022.
Annual average harmonized inflation fell to 6.0% in December (November: 6.5%). Meanwhile, consumer price inflation rose to 3.7% in December, from the previous month’s 3.2%, while core inflation dipped to 3.5% in December, from 3.8% in November.
Lastly, harmonized consumer prices increased 0.24% over the previous month in December, contrasting the 0.71% drop seen in November. December’s result marked the highest reading since August.
Our panelists expect harmonized inflation to average around Q4 2023 levels in Q1 2024, before declining more sharply in H2 2024 on weak domestic demand and the lagged impact of past ECB rate hikes. That said, inflation is only seen returning to the ECB’s 2.0% target in 2025, with energy prices this year expected to exceed pre-Ukraine war levels. Further commodity-price spikes and wage-price spirals pose upside risks.
ING’s Global Head of Macro, Carsten Brzeski, commented:
“The weakening of demand as a result of higher interest rates should lead to actual price drops in the coming months […]. However, on the other hand, the German government’s measures to close the 2024 funding gap in the budget will insert new upward pressure on inflation. The return of the limited VAT [to normal levels…,] the increase in CO2 emission pricing, the introduction of a plastic tax, a flight tax and the end of energy price caps are new inflationary drivers in 2024. As a result, we expect German inflation to hover around 3% YoY in 2024, with risks clearly tilted to the upside.”