The German Consumer Price Index (CPI) is an important economic indicator that reflects price changes in the German economy. This indicator indicates the level of inflation in the country and is an essential tool for analyzing economic health. In this article, we will discuss the preliminary German CPI analysis on a monthly basis, focusing on the factors that affect it and future expectations.
Factors that affect the CPI
Many factors affect the movement of consumer prices in Germany. First, there are changes in the prices of raw materials such as oil and gas, which affect transportation and energy costs. Changes in the supply and demand for goods and services also lead to price fluctuations. On the other hand, the economic and monetary policies followed by the European Central Bank indirectly affect the inflation rate.
In addition, changes in the German labor market may cause prices to increase or decrease. For example, an increase in wages may lead to an increase in demand for goods and services, which raises prices. Also, rental and housing prices are among the most prominent factors that contribute to the increase in the CPI.
Recent developments in the German CPI
The latest data on the German CPI showed a slight decline in the inflation rate. According to the preliminary report for December, the index fell by 0.3% compared to the previous month. This decrease reflects the impact of falling prices for some basic commodities such as fuel and energy.
In addition, seasonal factors contributed to the temporary reduction in prices. In many European countries, including Germany, prices for some commodities fall with the onset of winter, especially in the energy and food sectors. This contributes to reducing inflation in the short term.
German inflation is good news for supporters of the European Central Bank
German inflation accelerates in November, will strengthen opposition to 50 basis point rate cut The recently released German inflation report for November ended a good day for ECB supporters. With headline inflation accelerating and economic sentiment stabilizing, opposition to a 50 basis point rate cut at the December meeting will strengthen.
German headline inflation came in at 2.2% y/y, up from 2.0% y/y in October. In September, headline inflation remained at 1.6% y/y, while the European inflation gauge came in at 2.4% y/y.
German inflation to move into the 2% to 2.5% range
The rebound in German inflation today was mainly due to the effects of a less favorable energy base, while the timing of the school holidays during the fall season has put downward pressure on headline inflation.
Looking ahead, inflation looks set to remain at a slightly elevated level as the effects of the favorable energy base continue to fade while wages rise. However, with the current shift in the labor market, wage growth is expected to fall more sharply than previously anticipated, leading to further deflationary pressures in the coming year. As a result, we continue to expect inflation to remain within the broad 2%-2.5% range in 2025.
Growing opposition to a 50bps rate cut in December
With the surprisingly improved eurozone sentiment today and now German inflation, some ECB members may start to question the decision to cut rates in October and the bank’s openness to a deeper rate cut at the December meeting.
What remains is the real idea, shared by almost all ECB officials, that the rate-cutting cycle will continue. The only question is how long and by how much. Isabel Schnabel’s comments yesterday clearly underlined the hawkish argument for a very gradual rate cut.
Inflation in Germany is accelerating, which should cool the argument for a 50bps rate cut
With macroeconomic data, and not just from Germany, ECB hawks will be encouraged to argue against a 50bps rate cut in December.
A good day for ECB hawks
With eurozone GDP growth in Q3 beating September expectations (0.4% q/q vs. 0.2% q/q) and inflation in Germany picking up again, some ECB members may be starting to doubt the October rate cut decision and open the door to deeper rate cuts. In fact, today’s data makes the October rate cut decision more data-driven than data-driven. More hawkish ECB members are now likely to start to doubt the need to ease monetary policy faster and more aggressively, as the more dovish ECB members suggested last week.
Looking ahead, a lot can still happen between now and the next ECB meeting in December. The outcome of the US election will be important for the eurozone economy and the ECB, but the regular flow of macro data will also provide further guidance on two key questions for the ECB:
Have the deflationary trends just stopped, or are they real?
Does the ECB acknowledge the structural weakness in the eurozone economy or will it continue to believe in a return to potential growth from early 2025 onwards?
It is also interesting that there is very little talk at the ECB at the moment about the factors that are pushing inflation up structurally. What happened to “green inflation” or the arguments made in the past that demographics and changes in globalization would also push price pressures up?
