(Repetition: Several spelling errors corrected: in the 3rd paragraph, 2nd page “a further increase in price levels”; in the 9th paragraph, 1st page “purchasing power of consumers”; subheading before the 13th paragraph: “Economists expect 2025 Normalization”.)
WIESBADEN (dpa-AFX) – Inflation in Germany is more persistent than expected. December brought the third increase in a row at 2.6 percent and the second highest inflation rate in 2024, as the Federal Statistical Office announced. Economists do not expect any significant easing in consumer prices for the time being – even if another major wave of inflation is considered unlikely.
“In January, inflation is likely to be similarly high due to higher prices for CO2 and insurance services,” predicts Commerzbank chief economist Jörg Krämer. “The inflation problem has not yet been solved.”
Michael Heise, chief economist at asset manager HQ Trust, also sees no relief for consumers in January. “The increase in the CO2 tax, the increase in the price of the Germany ticket, rising costs for private health insurance and services mean that a further increase in price levels of around 2.5 percent can be expected.”
And for ING (ING Group) chief economist Carsten Brzeski, the current data shows “that the summer celebrations about successfully overcoming the inflation monster were premature.”
Annual inflation at 2.2 percent
Despite the increase in December, inflation in Germany has fallen noticeably. According to statistics, on average in 2024, prices for goods and services rose by 2.2 percent compared to the previous year.
For comparison: in 2023 the inflation rate was 5.9 percent and in 2022 it was 6.9 percent. In the wake of Russia’s war of aggression against Ukraine in February 2022, energy prices in particular shot up. The inflation rate was also significantly higher in 2021, at an average of 3.1 percent.
Inflation is likely to remain above the two percent mark for the time being
Economists expect the inflation rate to initially remain above the 2 percent mark in the new year. Some economists see less scope for the European Central Bank (ECB) to cut interest rates.
However, no expert expects a new wave of inflation like in 2022 and 2023, when the inflation rate in Europe’s largest economy climbed to almost nine percent. Instead, economists expect an annual inflation rate for the whole of 2025 at the same level as 2024. The German Council of Economic Experts (“Economy”) assumes average inflation of 2.1 percent.
Higher inflation rates reduce the purchasing power of consumers. People’s financial freedom is shrinking and income growth is being eaten up by inflation.
Inflation rises significantly in December
In December, services such as visits to restaurants, airline tickets and insurance were once again among the inflation drivers. They rose in price by 4.1 percent. Companies often pass on high wage agreements to customers.
People had to pay 2.0 percent more for food than a year before. This meant that the price increase increased somewhat here again. “Many people probably felt the higher food prices directly in their wallets during the Christmas season,” wrote Stephanie Schoenwald, economic expert at KfW Research.
On the other hand, refueling and heating were cheaper than a year earlier: overall, energy prices fell by 1.7 percent. However, the decline was not as sharp as in November (minus 3.7 percent). Core inflation excluding volatile energy and food prices rose to 3.1 percent.
Economists expect normalization in 2025
Nevertheless, many economists are cautiously optimistic for 2025. “The inflation dynamics are likely to normalize this year,” says Silke Tober, monetary policy-Expert at the Institute for Macroeconomics and Business Cycle Research (IMK). “Service prices will rise less sharply, especially because the catch-up wage trend is weakening, the increase in VAT on food in restaurants no longer plays a role and the massive price increases for individual services such as vehicle insurance and care facilities are coming to an end.”
“The short-term increase in inflation should not be misleading,” says Michael Herzum, head of economics at fund provider Union Investment. A large part is due to statistical effects on energy. The ECB is close to achieving its inflation target sustainably. The price increase for services is still too high. “But the highest salary increases are behind us because the situation on the labor market is deteriorating.”
How does the ECB react?
The ECB cut key interest rates four times in 2024 due to the easing of inflationary pressure in the euro area – to the current 3.0 percent for the benchmark deposit interest rate. Economists expect further interest rate cuts from the central bank in 2025, which will result in an inflation rate of two percent in the medium term Eurozone strives for.
“The data is anything but a call for rapid interest rate cuts,” says economist Heise from HQ Trust. And Ulrike Kastens, European economist at Deutsche Bank fund provider DWS (DWS Group GmbHCo), says: “Today’s figures from Germany are a clear warning not to play down the existing risks of inflation too quickly.”/als/ben/DP/men
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