Thanks to cheaper energy, the inflation rate in Germany fell in February to its lowest level since June 2021. Food prices have also not become as expensive recently.
Falling energy prices have pushed inflation in Germany to its lowest level in more than two and a half years. Consumer prices rose by only 2.5 percent in February compared to the same month last year, as the Federal Statistical Office announced today in its first estimate.
This is the lowest level since June 2021 when it was 2.4 percent. In January, inflation was 2.9 percent and in December it was 3.7 percent. Economists surveyed by the Reuters news agency had only expected a decline to 2.6 percent.
Energy prices fall by 2.4 percent
The falling inflation rate in February was primarily due to cheaper energy: it cost an average of 2.4 percent less than in February 2023, after these prices had even fallen by 2.8 percent in January. In addition, food prices no longer rose as much. They only cost 0.9 percent more, after plus 3.8 percent in January.
3.4 percent more were charged for services than a year before. The so-called core inflation – which excludes energy and food prices – also remained at 3.4 percent. There has therefore been no decline in the inflation measure, which is particularly important for the European Central Bank (ECB). “Obviously the sharp rise in wage costs is slowing the decline in underlying inflation,” explained Ralph Solveen from Commerzbank.
“The last mile in the fight against inflation is the most difficult,” added Jörg Krämer, chief economist at the financial institution. The time is therefore not yet ripe for interest rate cuts by the ECB, which has significantly tightened its monetary policy in the fight against high inflation. “Inflationary pressure continues to say goodbye,” said Alexander Krüger, chief economist at the private bank Hauck Aufhäuser Lamp. However, the sharp rise in wages is still a brake on consistently achieving the inflation target of two percent.
Fewer companies want to raise prices
German consumers can now hope that inflation will continue to fall: fewer companies want to raise their prices in the coming months. The corresponding barometer for price expectations fell to 15.0 points in February, after 18.8 points in January, as the Munich ifo Institute announced in its company survey.
“Inflation is therefore likely to continue its decline in the coming months,” said ifo economics director Timo Wollmershäuser. The economists at Deutsche Bank Research expect an annual average inflation rate of 2.2 percent. In 2023, prices had risen by an average of 5.9 percent. In 2025 they are only expected to rise by 1.9 percent.
Given the decline in inflation, employees can prepare for rising real wages. These increased again in 2023 for the first time after three consecutive declines, but only by a minimal 0.1 percent. “We should see the strongest increase in real wages this year since 2015,” said ING chief economist Carsten Brzeski. This is important in order to help the sluggish economy get back on track and boost consumption, added KfW chief economist Fritzi Köhler-Geib.