Inflation in Germany rose to 2.2 percent in November, as the Federal Statistical Office announced in its forecast on Thursday. Consumers had to dig deeper into their pockets, especially for services such as package holidays and insurance. These rose in price again by four percent compared to the same month last year, according to the statisticians. Food costs 1.8 percent more, while energy prices fell by 3.7 percent. “In December, too, the inflation rate in Germany and the euro area is likely to be over two percent. Further interest rate cuts by the ECB are likely to be postponed until next year,” said Michael Heise, chief economist at HQ Trust.
In October, the inflation rate in this country was still at 2.0 percent, which was also a significant increase compared to the previous two months of September (1.6 percent) and August (1.9 percent). Germany, as the largest economy in the euro zone, has a strong influence on overall inflation in the monetary union, where inflation also climbed to 2.0 percent in October. The statistics office Eurostat will publish the inflation figure for November on Friday. The ECB is aiming for an inflation rate of exactly 2.0 percent in the medium term and expects to achieve this goal next year.
The ECB monetary authorities had expected stronger price increases in November. Because inflation data is calculated year-on-year, fluctuating energy prices create a statistical base effect. However, wage increases and rising prices in the service sector are causing prices to continue to rise. Food in particular has been affected, while energy prices have fallen.
In mid-December, the ECB will decide on further key interest rate cuts. The central bank has lowered the most important key interest rate, the deposit rate, in three steps since the summer to the current 3.25 percent. The debate as to whether there will be another interest rate hike at the turn of the year and how strong it should be is in full swing. ECB chief economist Philip Lane has spoken out in favor of further interest rate cuts to support the economy. Bundesbank President Joachim Nagel pleaded for caution. “We will decide whether there will be another interest rate step in December based on the data available at that time,” said Nagel. It is still important to be cautious and “to loosen monetary policy only gradually and not too quickly.” There are still risks. It cannot be ruled out that wage growth will decline more slowly than expected. The influential ECB director Isabel Schnabel expressed similar caution. However, ECB Director Piero Cipollone and Portugal’s central bank chief Mario Centeno have clearly spoken out in favor of further interest rate cuts. The financial markets expect major cuts in key interest rates; they expect the deposit rate to be 1.75 percent in December 2025.
In view of falling inflation, all major central banks have now reduced key interest rates. However, the negative consequences of the multi-year price surge remain because the cost of living has risen enormously. Higher wages cannot compensate for the deficit in all industries. The price surge in recent years was primarily triggered by production and delivery stops during the corona pandemic, and was later intensified by Russia’s invasion of Ukraine. Goods and raw materials were scarce. Consumers had to pay significantly more for food and energy. Inflation rose to more than ten percent at times in 2022. As a result, unions demanded high wage increases due to inflation, which the monetary authorities believed maintained price pressure.
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