German inflation drops by more than expected in December

German inflation drops by more than expected in December
© Reuters

By Geoffrey Smith and Scott Kanowsky — German headline inflation fell by more than expected in December, thanks in large part to government measures to ease household energy bills, but analysts warned that underlying inflation remained uncomfortably high.

The annual consumer price index dropped to 9.6% from 11.3% registered in the prior month, according to preliminary EU-harmonized data from the German federal statistics office on Tuesday. The figure is also down from a seven-decade high of 11.6% reached in October.

Forecasts had estimated inflation for the final month of 2022 in Europe’s largest economy would come in at 10.7%.

When not adjusted for the European-wide measure, year-on-year German CPI was 8.6%, decreasing from 10% in November.

“Looking ahead, headline inflation in Germany seems to have reached its peak and, unless there is another large surge in energy prices again, double-digit inflation numbers should be behind us for a long while,” analysts at ING said in a note.

“However, the path towards substantially lower inflation rates won’t be easy. For the time being, it is lower energy prices and hence base effects, as well as government interventions that are pushing down headline inflation.”

Meanwhile, preliminary numbers for December from the country’s largest federal states pointed to core inflation remaining at more than twice the European Central Bank‘s 2% target and showed little improvement at the end of the year.

The state of North Rhine-Westphalia – Germany’s largest by population and economic output – said annual inflation slowed to 8.7% in December from 10.4% in November and a peak of 11% in October, as rebates on household fuel bills caused a 12.6% drop in energy prices during the month, which pushed the overall consumer price index down by 1.0% from November.

However, food prices – the largest part of many families’ monthly outgoings – rose another 0.5%, leaving them up 13.8% on the year.

More worryingly, the overall CPI without volatile food and energy prices rose 1.0%, pushing the annual ‘core’ measure of inflation up to 4.9% from 4.6%. Oliver Rakau, an economist with Oxford Economics, said via social media that the latter number “will be more important for the ECB.”

At her last press conference of 2022, ECB President Christine Lagarde had struck a hawkish tone, warning that underlying inflation was likely to stay strong despite a decline in the annual headline numbers as last year’s sharp increases in energy prices start to pass out of the calculations.