Germany's inflation rate increased to 3.7% YoY in December, up from 3.2% in November, mainly due to a 4.1% rise in energy prices influenced by a government subsidy. Food inflation fell slightly. Excluding food and energy, core inflation was 3.5%. France also saw a slight uptick in inflation to 3.7%.
ADVERTISEMENTThe inflation rate in Germany has marked a notable uptick for the first time in seven months, as the consumer price index (CPI) surged to 3.7% year-on-year in December, per the preliminary data from the Federal Statistical Office (Destatis) unveiled on Thursday.
The jump from November's 3.2% inflation rate aligns with economic forecasts. On a month-over-month basis, the CPI saw a modest rise of 0.1% from November, matching the expectations of economists.
What's causing German inflation?
A critical driver of this inflationary pressure was the 4.1% increase in energy prices compared to the previous year, halting what had been a two-month deflation in energy prices. The energy sector's pricing patterns were significantly influenced by a base effect due to the "December emergency aid" initiative, a one-off measure by the federal government in December 2022 to subsidise household gas and heat expenses. This action had a tempering effect on the inflation figures for December last year, thus contributing to the comparative uptick in December 2023.
Despite the overall increase, there was a silver lining as food inflation eased slightly. Food prices in December 2023 were up 4.5% year-on-year, a deceleration from November's 5.5% and October's 6.1%.
When excluding the more volatile items of energy and food from the inflation basket, the core inflation stood at 3.5% for December, showing a slight retreat from November's 3.8%. Inflation for services fell to 3.5% year-on-year, down from November’s 3.8% figure.
In a related economic update, France reported a marginal rise in its consumer price inflation, reaching 3.7% in December 2023 on a year-over-year basis.
Market Reactions
Markets reacted to the inflation news with a degree of caution. Yields on 10-year Germany's government bonds edged higher, touching a 2.1% yield—a nearly 10-basis-point rise on the session. The euro was 0.3% higher against the dollar and maintaining its gains through the trading session. Meanwhile, the German DAX index remained mostly unchanged, stabilising after a cumulative 1.4% drop over the two previous sessions.
This inflation data underscores the delicate balancing act facing the European Central Bank (ECB) as it seeks to navigate between curbing inflation and fostering economic growth amid a landscape of geopolitical uncertainties and ongoing supply chain challenges.
