German inflation rises in December due to base effects

German inflation rises in December due to base effects

By Maria Martinez

BERLIN (Reuters) -German inflation rose in December due to base effects, putting a temporary halt on the downward trend seen in the last months and possibly offering the European Central Bank an argument in favour of keeping interest rates steady for some time.

Inflation, harmonised to compare with other European Union countries, rose in December to 3.8% year-on-year, the federal statistics office said on Thursday, in line with the expectations of analysts polled by Reuters and up from 2.3% in November.

“For the ECB, this re-acceleration of inflation strengthens the stance of keeping a very steady hand and not rushing into any rate cut decisions,” said Carsten Brzeski, global head of macro at ING, who forecasts the first rate cut in June.

Economists pay close attention to German inflation data, as Germany usually publishes its figures one day before the euro zone inflation data release.

Euro zone inflation, due on Jan. 5, is expected to rise to 3.0% in December from 2.4% in November, according to economists polled by Reuters.

In December, ECB President Christine Lagarde flagged upside inflation risks to push back on imminent rate cuts.

The rise in German inflation reflects the impact of last December’s energy relief measures for gas and district heating, the statistics office said.

Measures planned by the German government to bring its 2024 budget in line with a constitutional court ruling will also drive up inflation in January, Commerzbank’s senior economist Marco Wagner said.

Even if inflation then tends to subside over the course of the year, wage pressures remain strong, meaning it is ultimately likely to stabilise at 3% rather than 2%, Wagner said.

While energy prices fell 4.5% year-on-year in November, they jumped 4.1% last month compared with December 2022, when a government-support package lowered prices.

However, the rise in food prices weakened further in December, with prices rising 4.5% from a year earlier, compared with 5.5% in November.

Core inflation, which excludes volatile food and energy prices, fell to 3.5% in December from 3.8% in November.

“With core inflation continuing to trend down, it should not affect investors’ expectations for the ECB to begin cutting interest rates in the coming months,” said Andrew Kenningham, chief Europe economist at Capital Economics.

He expects core inflation to keep easing in the first quarter with a first interest rate cut in or around April.

(Reporting by Maria Martinez, Editing by Rachel More and Tomasz Janowski)