At the beginning of the current year, inflation in Germany showed a slowdown, the pace of which turned out to be more significant than initial expectations for the dynamic of the decrease in the intensity of growth in the cost of goods and services.

Nowadays, a decline in inflation is being recorded throughout the EU. Against the background of this economic reality, the European Central Bank (ECB) will likely begin implementing a policy of lowering interest rates in the foreseeable future.

This month, consumer prices in Germany showed an increase of 3.1% year-on-year. The relevant data was released by the statistics office of this country on Wednesday, January 31. In December, consumer prices in Germany rose by 3.8%. Economists had expected this figure to increase by 3.2% in January.

Also on Wednesday, it became known about a sharper-than-expected slowdown in inflation in France, where the increase in the cost of goods and services was recorded at 3.4%. At the same time, in Spain, consumer prices have shown an increase rate that exceeds analysts’ forecasts. In January, inflation in this country was recorded at 3.4% after 3.1% a month earlier.

Data for 20 eurozone countries will be published on Thursday, February 1.

Economist Martin Ademmer expects lower inflation in the EU in the coming months. According to the expert, this figure will be less than 2% in the second half of the current year. At the same time, the economist says that core inflation is likely to have increased this month and will continue to be fixed at a level higher than initially forecast throughout 2024. Martin Ademmer separately noted that against the background of the implementation of this scenario, German politicians who adhere to the so-called hawkish position will begin to worry about the continued growth in the cost of goods and services and the too-early reduction of interest rates.

ECB officials insist that it is currently too early to declare victory over inflation. They want to be sure that price growth is approaching 2% before making decisions aimed at easing monetary policy.

Mario Centeno, Governor of the Bank of Portugal, believes that a sufficient volume of information to decide on interest rates will be formed by April. Markets expect monetary policy easing in the middle of spring.

ECB President Christine Lagarde says an interest rate cut is more likely in June. This month, the results of salary bargaining for the first quarter of 2024 will be announced.

Joachim Nagel, president of the Bundesbank, the central bank of Germany, said on Tuesday, January 30, that inflation is moving in the right direction. According to him, the underlying price pressure remains too high. He also noted that the prospects for salary growth are uncertain. Moreover, the head of the German central bank drew attention to unstable energy prices.

Joachim Nagel adheres to the official policy line of the ECB, according to which the debate on lowering interest rates is currently premature. At the same time, he did not say when, in his opinion, the right moment for appropriate decisions would come.

The Bundesbank expected a significant slowdown in German inflation in January after statistical effects raised the rate at the end of 2023. In the current month, prices in this country fell by 0.2% compared to the figure recorded in December. The reduction in travel and clothing costs was able to offset the pressure generated by the return to full sales tax rates on natural gas, district heating, and food in restaurants. Moreover, the national carbon price has increased.

For the whole of 2023, inflation in Germany was 5.9%. In 2022, this figure was recorded at 6.9%, which is the highest figure in the last few decades.

In recent years, Germany has been facing economic challenges. In 2022, an increase in the cost of energy prices was recorded. This economic circumstance has become a sensitive factor of negative impact on the German industry, which had to increase costs. In some cases, against the background of an unfavorable situation, decisions to transfer production facilities to other countries were recorded. Last year, a gradual normalization of the situation began, which still yet continues to be difficult.

By the end of 2022, price growth in Germany peaked. Last year, the negative dynamic began to decline after a series of interest rate hikes by the ECB.

Carsten Brzeski, head of macro-economic research at ING bank, said in early January that the current situation strengthens the ECB’s confidence that it should not rush to lower interest rates.

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