Inflation in Germany continues to lose pace. The rate fell in February to its lowest value since June 2021. Energy is cheaper than a year earlier.
Inflation in Germany continues to decline. According to preliminary data from the Federal Statistical Office on Thursday, consumer prices in February were 2.5 percent higher than in the same month last year. It was the lowest value since June 2021 at 2.4 percent. An annual inflation rate of 2.9 percent was recorded in January and 3.7 percent in December.
Economists expect inflation to fall further over the course of the year. However, the decline could slow down. Stress factors include the increase in the CO₂ price from 30 euros per ton of carbon dioxide (CO₂) to 45 euros and the return to the regular VAT rate on food in restaurants at the beginning of the year.
Wage increases should be above the inflation rate
Higher inflation rates reduce the purchasing power of consumers. People can afford one euro less. Many people turned their back on consumption last year.
According to preliminary figures, household energy and fuel prices fell by 2.4 percent in February compared to the same month last year. Food costs 0.9 percent more than in February 2023. The increase thus weakened. An increase of 3.8 percent was recorded in January. According to preliminary data, consumer prices rose by a total of 0.4 percent compared to the previous month of January.
The federal government expects consumer prices to rise by an average of 2.8 percent this year after 5.9 percent in 2023. Federal Minister of Economics Robert Habeck assumes that wage increases this year will be above the inflation rate. The expectation is that employees will also spend the money and thus stimulate private consumption. Private consumption is an important pillar of the German economy.
Bundesbank: It is too early to cut interest rates
However, Bundesbank President Joachim Nagel recently warned: “Even if the temptation may be great, it is too early to cut interest rates.” Inflation is on the decline both in Germany and in the euro area. But the goal has not yet been achieved. The European Central Bank is aiming for price stability in the euro area in the medium term with an inflation rate of two percent. Since the summer of 2022, the euro currency watchdogs have countered the temporarily significant rise in inflation with ten interest rate increases in a row.
Higher interest rates make loans more expensive, which can slow down demand and counteract high inflation rates. However, because rising loan interest rates also make investments more expensive and this can slow down the currently weakening economy, calls for interest rate cuts have recently become louder.
Source: Stern
