Lowering Inflation to 2.0% - Affordable Energy Contributes to Reduction
Germany's consumers are currently grappling with increased prices in their daily shopping, as items like butter, chocolate, fruit, and vegetables become more expensive. However, economists and economic institutes predict a decrease in Germany’s inflation rate for 2025, with the rate expected to hover around 2%.
The predicted easing of inflation is attributed to several key factors. One significant driver behind the easing inflation is the considerable fall in energy commodity prices, which reduces overall cost pressures, given energy's prominent role in inflation calculations.
A cooling labor market is also easing wage pressures, which in turn moderates consumer price increases. Subdued private spending also reduces demand-pull inflation effects. Specific sectors such as recreation and transport have experienced cost ease, which outweighs price increases seen in housing and hospitality sectors.
While interest rate cuts could exert upward pressure on inflation, this is expected to be broadly offset by the weakened euro and subdued spending, balancing overall inflationary trends. Faster wage growth and EU retaliatory tariffs remain potential upward risks, indicating that inflation could fluctuate depending on these factors and the timing and scale of fiscal stimulus.
In 2022, the average inflation rate in Germany was 6.9%, skyrocketing after Russia's attack on Ukraine, which caused energy and food prices to rise rapidly. However, the inflation rate has since dropped to its lowest level in over six months, reaching 2.0% in June 2024. This decline is partly due to cheaper energy compared to the previous year (-3.5%).
In May 2024, the inflation rate in Germany was 2.1%, and food prices increased by 2.0% in June 2024, down from a 2.8% increase in May 2024. The "core inflation" in June 2024 was 2.7%, down from 2.8% in the previous month.
Inflation for services, including insurance, package holidays, and car repairs, rose by 3.3% in June 2024. The still noticeable increase in service prices is likely to deter the European Central Bank (ECB) from further rate cuts for the time being. The ECB has already cut the deposit rate, which is significant for savers and banks, for the eighth time since last summer, most recently to 2%.
Economists, including the Council of Experts ("Five Wise Men"), expect an inflation rate of around 2% for the whole year 2025. The Bundesbank expects the inflation rate in Germany to fluctuate around the 2% mark in the coming months. At the next ECB decision on July 24, most economists expect a pause in rate cuts.
However, risks such as wage growth and fiscal policy will continue to be important to monitor for future inflation dynamics. The EU is negotiating with Washington to avoid a trade war, as the future inflation is uncertain due to the aggressive trade policy of former US President Donald Trump. Tariffs on industrial goods could affect consumer prices and drive inflation in the eurozone again.
Despite the renewed decline in the inflation rate, Jörg Krämer, Commerzbank chief economist, sees high inflation risks. The conflict between Israel and Iran had little impact on the inflation rate in Germany. Long-term projections forecast inflation to hover slightly above the ECB’s target of 2% for 2025 but trend downwards to around 1.9–2.1% by 2026-2027.
The easing inflation rate in Germany for 2025 is largely due to the anticipation of a decrease in energy commodity prices, which will help reduce overall cost pressures in finance calculations. The projected decline in inflation is also influenced by a cooling labor market, which eases wage pressures and moderates consumer price increases.
