German inflation slows to 9.6% thanks to household subsidies

Confidence edges up amid positive price and unemployment data but Bundesbank warns of continued uncertainty

Tue, 03 Jan, 2023 - 16:36

Jana Randow

German inflation slowed more than anticipated in December after the government paid some households’ gas bills for the month, offering a temporary respite in the country’s cost-of-living crisis.

Consumer price growth at 9.6% was the weakest since August. Economists anticipated 10.2%, according to the median of 20 forecasts.

The decline to single digits in the main rate masks an increase in food costs across Germany at the end of 2022, aggravating a squeeze on the poorest families and stoking the risk of a wage-price spiral.

“Price increases are likely to remain stubbornly high this year,” said Commerzbank chief economist Joerg Kraemer, who reckons state aid shaved 1.2 percentage points off the inflation rate.

In an environment of de-anchored inflation expectations, trade unions are likely to be able to push through significantly higher wage increases, and companies higher sales prices more easily.

The report provides investors with a possible foretaste of the overall number for the eurozone due on Friday.

At almost five times the European Central Bank’s goal, the strength of inflation in the region’s largest economy underscores the challenge faced by officials in bringing prices under control.

Policymakers including Bundesbank president Joachim Nagel have pledged further forceful action in response. That may mean extending an historic series of ECB interest-rate hikes with at least two more half-point steps early this year.

A strong labour market in Germany, where unemployment unexpectedly dropped in December, supports the argument that a mild winter recession will not push the economy off a cliff.

Confidence has even started to increase. After the country’s leading gauge for business expectations hit a six-month high in December, surveys of purchasing managers suggested this week that the downturn in manufacturing is easing as supply-chain frictions fade.

A slowdown in import and producer-price inflation is also offering relief, though both continue to run at a pace far above 20%.

The Bundesbank predicts consumer inflation will remain above 7% in 2023 and has cautioned against misinterpreting single data reports as a shift in trend, citing a “great deal of uncertainty”.

It is not yet clear how new price caps on gas and electricity will be considered in official statistics, officials argued in their latest monthly report, and a shift in the base year of the series will add volatility. Either way, German inflation rates are set to rise markedly again in January.

“Inflation in Germany is no longer just an inflation of energy prices, but has affected almost all goods and services,” said Friedrich Heinemann, an economist at the Mannheim-based research institute ZEW.

“Instruments like the gas-price brake ultimately only alleviate symptoms.”