Germany CPI forecast: Sharp drop in inflation masks more pain ahead in 2023
The latest German inflation data suggested the country would be ringing in the new year with something to celebrate as prices rose at their slowest pace since the summer.
But inflation of 8.6% in December – partly due to emergency aid – may not be a sign of what’s to come. With no end in sight to the conflict in Ukraine and supply chains continuing to struggle to keep pace with demand, when will interest rate hikes regulate prices over the long run? Here we take a look at Germany CPI forecast.
What is CPI and how is it measured in Germany?
The consumer prices index (CPI) is a weighted average of the increase in the price of a basket of goods and services, typically measured on a monthly or annual basis.
The weighted average is based on the collection of goods and services most likely to be consumed by households. It is the best indicator of affordability in an economy, given its breadth of data, timeliness, and real effects on families and businesses.
Energy and food prices weigh heavily on the indicator, while other items and services are strong signals of underlying price drivers.
Inflation is also the key indicator used by most central banks to set monetary policy, with the European Central Bank (ECB), which has an inflation target of 2%, being forced into a regimen of hikes as a direct result of the indicator.
In Germany, inflation is measured by the country’s federal statistics office, which releases headline data on both CPI and the Harmonised Index of Consumer Prices (HICP).
Germany’s inflation rate also closely tracks that of the Eurozone, given both the country’s dominance within the bloc and the deep economic links between member states.
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Germany’s CPI history over the years
Historically — namely during its time as a Eurozone member — Germany has been a low inflation economy, with a two-decade period where price rises stayed at or below the Bundesbank’s 2% target. This has been attributed largely to central bank independence, in addition to globalisation and falling protectionism reducing the price of goods. This was a trend apparent across Western economies in a period of deflationary pressures.
But the onset of the Covid-19 pandemic invoked massive government stimulus to support businesses, jobs and households through mass lockdowns. That led to pent-up demand, with much of the population able to continue working during most of the pandemic.
Likewise, global supply chains that shut down struggled to unclog themselves when restrictions loosened, forcing up the prices of goods. A “great resignation” trend in Western economies added to supply issues and price pressures.
The result, not least in Germany, has been a sharp and sudden appreciation in prices over the last year. Inflation began 2022 at 4.9%, rising quickly to 7.9% by May after Moscow’s invasion of Ukraine put more pressure on energy prices. After a lull in the summer, the CPI of Germany rose again to 10.4% in October as warning signs about winter fuel requirements shot back into view.
In November 2022, price rises fell to 10% in an apparent sign that inflation could be slowly regulating, with prices dropping 0.5% compared with the month prior, thanks in part to a slight regulation in energy prices. Georg Thiel, president of the Federal Statistical Office, noted that increases in food prices were notable.
The November reduction in German price rises tracks with the wider eurozone, where the HICP fell from 10.6% to 10% a month prior. Germany’s comparator indicator was 11.3% for the same month.
Latest data for December showed inflation in Germany fell again to 8.6%, thanks to government subsidies linked to energy costs. Increases in energy prices accordingly fell steeply, though price rises elsewhere remained steady.
In a note shared with Capital.com, Capital Economics’ senior Europe economist, Franziska Palmas, cautioned that while this was likely to see prices rise again in March, the longer term effects of subsidies may be more positive. Palmas wrote:
Energy bills continue to drive inflation
The chief driver of inflation in Germany – along with most of Europe – has been an energy bills shock, which rocked the economy in the wake of Russia’s invasion of Ukraine.
The country was heavily reliant on Russian energy prior to Russia’s campaign, with 55% of its gas imports coming from the country, according to the World Economic Forum. The group said that had fallen to 26% in June 2022. Gas imports from Russia were expected to fall to zero by 2024, according to Frank Umbach’s analysis for GIS:
In that context, the outlook on energy prices is rather bleak, with Russia widely expected to continue to choke off supplies in 2023 as its bitter fight with Ukraine rages on. German energy regulator Bundesnetzagentur wrote in a note in January 2023:
The crisis has kicked the German government into higher spending in order to alleviate bills on the most vulnerable households.
Chancellor Olaf Scholz promised at least €65bn to combat rising prices through policies that included benefit hikes and public transport subsidies. Indeed, it appears this was responsible for the sharper than expected slowing in price rises in December.
These supports in themselves could also have their own inflationary effects through increased liquidity in the economy and other distortionary effects on spending behaviour.
Inflation in Germany wasn’t helped in the last year by the euro’s weak performance against the dollar (EUR/USD) for most of 2022.
The US Federal Reserve’s (Fed) quicker response to inflation with interest rate hikes helped pour more demand into the greenback, which also benefited from its status as a safe haven asset in times of economic contraction. The US’s relative energy security also helped confidence in its currency.
For a period between September and November last year, the euro was worth less than the dollar. At its lowest ebb, the eurozone’s currency was down 15% on the year as inflation in the US fell faster than it did in the bloc. It has since been able to rebound, rising more than 10% since the end of September.
This recovery should help Germany’s import costs, as well as energy payments, which typically use dollars.
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Supply chain disruptions keep core inflation elevated
Even without acknowledging high energy prices, there are underlying pressures helping push up inflation in Germany.
Supply chains have been in upheaval ever since the onset of the Covid-19 pandemic, and have massively struggled to keep up with pent-up demand as the economy returned to normality.
This has helped drive core inflation, an indicator which is a better representation of how endemic certain price rises have become, and accordingly how hard they will be to bring down. That indicator has spiked above 5% in the last quarter of 2022, suggesting that even a halting of the Ukraine war would struggle to bring down price pressures.
Coming in as another pressure point for CPI forecasts in Germany is a hot labour market, which hasn’t yet been cowed by bearish market conditions, including a stock market collapse and possible oncoming recession.
Employment is at its highest level in Germany since the country reunified, rising 1.3% over 2022. While wage growth has been stunted, rising employment still puts upward pressure on prices.
Each of these factors – which are predominant across Europe – has convinced the ECB to turn hawkish. In an effort to reduce inflation, the bloc’s main interest rate has risen 250 basis points since being lifted from zero last year.
Germany CPI forecasts for 2023 and beyond
After the release of surprisingly positive November 2022 data, ING analyst Carsten Brzeski predicted inflation would rebound in December. While subsidies upset this prediction, he added that prices would probably reach a structural peak in the first quarter of 2023, noting:
The analyst added that core inflation could stay elevated for longer due to the base effect:
In a January interview with Bild newspaper, Germany’s finance minister Christian Blindner said the government expected inflation to average 7% over 2023, suggesting a slow return to the central bank’s 2% target.
Trading Economics’ Germany CPI forecast as of 3 January also suggested the rate could drop to 7% over 2023, before falling further to 3.6% in 2024.
In a September note, the ifo Institute was more pessimistic in its short-term Germany CPI prediction, forecasting prices to rise by 9.1% in 2023 before a sharp fall to 2.4% in 2023.
The Bundesbank meanwhile appeared more serene in its long-term CPI forecast for Germany, expressing its confidence in rate hikes to bring down inflation with a forecast of 2.2% HICP in both 2023 and 2024.
Note that analysts’ Germany CPI predictions can be wrong and shouldn’t be used as a substitute for your own research. Always conduct your own due diligence before trading looking at the latest news, technical and fundamental analysis, and a wide range of analyst commentary.
FAQs
What is the current CPI in Germany?
Latest data for December showed inflation in Germany fell again to 8.6%, thanks to government subsidies linked to energy costs. Increases in energy prices accordingly fell steeply, though price rises elsewhere remained steady.
Is the CPI expected to rise in Germany?
The Bundesbank expressed confidence in rate hikes to bring down inflation, forecasting a 2.2% HICP in both 2023 and 2024. In a September note, the ifo Institute was more pessimistic in its short-term Germany CPI prediction, forecasting prices to rise by 9.1% in 2023 before a sharp fall to 2.4% in 2023. Note that their predictions can be wrong.
What happens when CPI increases?
When CPI increases it could force central banks to raise interest rates in order to combat inflation.
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