German inflation in January will rise at its slowest pace in more than two and a half years, according to data released Wednesday, bolstering hopes that the European Central Bank may be able to reduce interest rates from record levels in coming months.
The Federal Statistics Office of Germany said a provisional reading of the headline consumer price index suggested an increase for the year to January of 2.9%, down from December’s 3.7% and lower than the 3% forecast by a Bloomberg poll of economists.
Annual core inflation, which strips out volatile item such as food and energy, dipped to 3.4% in January from 3.5% the month before. The month-on-month reading showed an increase of 0.2%, in line with market estimates and a touch firmer than December’s 0.1% advance.
The headline annual figure was the most meek since the June 2021 reading of 2.4%, said the FSO, partly dragged lower by a 2.8% fall in energy prices since January 2023.
Germany’s annual headline inflation rose above 10% in the autumn of 2022, amid a surge in energy prices across the continent following Russia’s full invasion of Ukraine earlier in the year, and as COVID pandemic supply disruptions forced up goods prices.
A similar trajectory for inflation across the eurozone caused the European Central Bank to hike its deposit interest rate from minus 0.5% in September 2019 to the current record high of 4%.
The ECB kept rates unchanged after its policy meeting last week. But as inflation falls in large economies like Germany, the market thinks the central bank might begin trimming borrowing costs by 25 basis points perhaps as early as May or June.
German 2-year bund yields
BX:TMBMKDE-02Y,
which are particularly sensitive to ECB policy trajectory, were down 3.1 basis points to 2.603% while the euro
EURUSD,
was little changed at $1.0850. Germany’s DAX equity index
DX:DAX
was down 0.1%, pressured by expectation of a weak open for Wall Street.
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