Inflation in Germany continues to weaken mourning for American comedian Richard Lewis

According to preliminary data from the Federal Statistical Office, consumer prices were 2.5 percent higher in February than in the same month last year. At 2.4 percent, it was the lowest value since June 2021.

An annual inflation rate of 2.9 percent was recorded in January and 3.7 percent in December. Ulrich Kater, chief economist at Dekabank, spoke of an “impressive decline” in inflation in recent months. However, there will be “one or two setbacks in the coming months.”

Economists generally expect a further decline in inflation over the course of the year, although this could slow. Stress factors include the increase in the CO2 price from 30 euros per tonne of carbon dioxide to 45 euros and the return to the regular VAT rate on food in restaurants at the beginning of the year. “The last mile in the fight against inflation is the most difficult,” expects Jörg Krämer, chief economist at Commerzbank.

Energy cheaper – services more expensive

Higher inflation rates reduce the purchasing power of consumers. People can afford one euro less. Many people have turned their backs on consumption in the past year.

According to preliminary figures, energy and fuel prices for households fell by 2.4 percent in a year in February, after a fall of 2.8 percent in January. Food, on the other hand, cost 0.9 percent more than in February 2023. However, the increase weakened.

An increase of 3.8 percent was recorded in January. Prices of services are expected to rise by 3.4 percent. “Although the favorable development on the gas and electricity markets provides a tailwind, it remains to be seen how persistent the price increase for services will be,” said KfW chief economist Fritzi Köhler-Geib.

According to preliminary data, consumer prices rose by a total of 0.4 percent compared to the previous month of January.

The federal government assumes that wage increases will exceed inflation

The federal government expects consumer prices to rise by an average of 2.8 percent this year, after 5.9 percent in 2023. Minister of Economic Affairs Robert Habeck assumes that wage increases will be above inflation. 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.

Last year, the 6.0 percent increase in wages was almost completely offset by the 5.9 percent increase in consumer prices. According to the statisticians, there was an increase in real wages of 0.1 percent, the first increase since 2019. However, in many companies, the inflation compensation premiums paid in nominal wages were also taken into account.

These one-off payments are exempt from state taxes and contributions and have led to a disproportionate increase in incomes in the lower salary groups. In a previous assessment, WSI’s trade union collective bargaining archive noted a further decline in real wages of 0.4 percent for workers in collective bargaining for 2023. This calculation did not fully take into account inflation compensation premiums.

Bundesbank President Nagel warns against cutting interest rates too early

Despite the fall in inflation, Bundesbank President Joachim Nagel recently warned: “Even though the temptation is great: it is still too early to cut interest rates.” Inflation is falling in both Germany and the eurozone. But the goal has not yet been achieved.

The European Central Bank (ECB) aims 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 increase in inflation with ten rate hikes in a row.

Higher interest rates make loans more expensive, which can slow demand and counteract high inflation. But because rising loan rates also make investments more expensive and could slow down the currently weakening economy, calls for interest rate cuts have become louder lately. (sda/awp/dpa)