Lower petrol and heating oil prices pushed inflation in Germany down to its lowest level in seven months in March. Goods and services cost an average of 7.4 percent more than a year earlier, as the Federal Statistical Office announced in an initial estimate on Thursday. In January and February, inflation was still 8.7 percent. Economists surveyed by the Reuters news agency had even expected a decline to 7.3 percent.
“This should be the first step in a sustained downward trend in inflation rates in Germany,” said the scientific director of the Institute for Macroeconomics and Business Cycle Research (IMK), Sebastian Dullien. “In the coming months, a further, continuous decline in inflation rates is to be expected.” However, many experts are not giving the all-clear. “It’s not a breakthrough in fighting inflation,” said Michael Heise, chief economist at HQ Trust. “Basically, what’s happening from month to month is more important to the consumer.” And here the inflation is still quite high. From February to March, prices rose by 0.8 percent.
The so-called basic effect has a relaxing effect
Food remained the number one price driver: it rose by an average of 22.3 percent compared to March 2022 and thus more than in February with 21.8 percent. “This is mainly due to the fact that vegetables have apparently become scarce due to crop failures in some supplier countries,” said the chief economist at Berenberg Bank, Holger Schmieding. Energy cost only 3.5 percent more than a year ago, after 19.1 percent in February. A favorable base effect played a role here. A year ago, after the Russian invasion of Ukraine, energy prices skyrocketed. Now, for the first time, they are compared with the already increased prices, no longer with the lower ones before the outbreak of war – this is referred to as the base effect. In North Rhine-Westphalia, for example, fuels such as petrol and diesel became cheaper by 19.3 percent, in Bavaria by 17.1 percent.
“New wave of costs” due to high wage agreements
“That’s not the all-clear for the ECB,” said economist Schmieding. The reason for this is the stubbornly high core inflation, which takes into account the strongly fluctuating energy and food prices. According to Commerzbank, it even rose in March, from 5.7 to 5.9 percent. This is a sign that inflation is increasingly affecting the economy. Commerzbank chief economist Jörg Krämer is therefore not yet giving the all-clear. “The underlying price increase is still very high. It should stay that way for a long time,” said Kramer. “After all, with the foreseeable sharp increase in wages, a new wave of costs is rolling towards the economy.”
According to ECB Director Isabel Schnabel, core inflation is now proving to be much more resilient than headline inflation. “And of course that causes some headaches for central bankers, too,” she noted. The European Central Bank (ECB) raised its key interest rate from 3.0 to 3.5 percent this month in a bid to curb inflation across the euro zone. The economists expect an annual average inflation rate of 6.6 percent, after 6.9 percent last year. Only in 2024 is it likely to drop noticeably to 3.0 percent.