German Inflation Slowdown in January Highlights ECB Dilemma

Updated on
  • Consumer prices rise annual 1.4% vs estimated 1.6% gain
  • Eurostat will release euro-area inflation data on Jan. 31
The subdued inflation outlook means the ECB can "lean back," Berenberg’s Holger Schmieding says.

German inflation unexpectedly slowed for a second month in January, highlighting the challenge the European Central Bank faces as it gauges when it can start unwinding stimulus. The euro dropped.

Consumer prices rose an annual 1.4 percent, the Federal Statistics Office said on Tuesday. That’s less than the 1.6 percent increase recorded in December and the median estimate in a Bloomberg survey. Prices fell 1 percent from December.

Price growth has remained weak even as Europe’s largest economy enjoys strong growth, with record-low unemployment bolstering consumption and manufacturers seeing their capacity stretched to the limit by booming foreign demand.

Tuesday’s inflation report adds downside risk to economists’ forecasts for euro-area consumer prices. The median estimate in a separate survey conducted before the German data was for a slowdown to 1.2 percent, the weakest in more than a year. Eurostat will release those figures on Wednesday. 

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“Weaker inflation in the euro-area’s largest economy is bad news for those policy makers at the European Central Bank that are calling for an end to the QE program sooner rather than later.”

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The euro dropped after the report before recouping losses. The single currency traded at $1.2426 at 2:18 p.m. Frankfurt time, up 0.4 percent.

“There are still hardly any signs that underlying inflation could accelerate,” said Carsten Brzeski, chief economist at ING-Diba in Frankfurt. “For the time being, the ECB’s own assessment and confidence that inflation will substantially pick up remains more wish than reality.”

ECB chief economist Peter Praet argued on Monday there’s still some way to go before inflation is back on track, urging for patience and persistence in setting monetary policy. His comments came a day after Dutch central banker Klaas Knot said asset purchases have done all that can realistically be expected and should end as soon as possible after September.

In a sign that inflation could be nearing takeoff, Germany’s most powerful union is escalating a dispute over wages with day-long strikes this week after talks broke off without a deal on Saturday. It’s asking for pay increases of 6 percent and wage subsidies for workers who reduce hours to care for children or older family members.

— With assistance by Kristian Siedenburg, and Andre Tartar

(Updates with comment from economist in sixth paragraph.)
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