German Data Preview (Feb 29): Inflation Drop Broadens Out to Services?
Base effects continue to distort the German HICP/CPI readings, but the January data came in a notch below expectations, and reversed half of the surge in the y/y rate seen in December. Indeed, the HICP rate fell 0.7 ppt to 3.1% and the CPI core down a notch to 3.1% as the headline CPI rate dropped to 2.9%, the lowest value since June 2021. We see the HICP rate easing further in the February data, to a 32-month low of 2.7%, probably with core down too as services inflation succumbs to base effects (Figure 1). Energy prices in February may pose some upside risks and there may be some added momentum in services inflation picked up, very probably a result of higher VAT being levied on restaurant meals in January may still be being passed on to consumers. Regardless, the disinflation backdrop is underlined by what may be still-soft core seasonally adjusted trend which may be running just around 0.1% in m/m terms and where this very creaky waning price momentum should see headline HICP below 2% by May, albeit with some swings possibly accentuated by the early Easter this year.
Figure 1: CPI Headline and Core Inflation to Drop Further?
Source: German Federal Stats Office, CE
Headline HICP inflation eased afresh in January, falling from 3.8% to 3.1%. This was mainly due to the elimination of the base effect from the 2022 price-lowering Act on Emergency Aid for Natural Gas Heating for End Consumers, which had pushed up the December rate significantly. Moreover, food and non-energy industrial goods inflation dropped considerably. By contrast, growth in prices for services gained momentum at the beginning of the year, partly due to unfavourable swings in the weights. Rents went up markedly and numerous insurance premiums became significantly more expensive. In addition, prices in restaurants and cafés recorded an extraordinary surge, reflecting the expiry of the temporary VAT cut for meals eaten in catering establishments.
Even the Bundesbank expects overall inflation to continue to fall in the coming months. However, the year-on-year rate could fluctuate sharply owing to various base effects from energy and local public transport. Easter falls earlier this year than last, and this, too, will impact on the prices of package holidays and therefore on the inflation rate. Regardless, inflation for food and other goods is likely to decline further over the next few months and we see the overall HICP rate dipping below 2% by April.