Inflation in Germany weakened further in February, with the consumer price index (CPI) up an annual 2.5% this month compared to a 2.9% annual rise in January, according to preliminary data released by the Federal Statistical Office on Thursday.
Economists expect inflation to fall further over the course of the year. However, the decline could lose pace due to an increase in carbon pricing - the cost of emissions - to €45 per ton from €30 ($33) per ton and a return of the regular value added tax rate on food in restaurants.
Higher inflation rates reduce the purchasing power of consumers, resulting in many cutting back on expenditures.
According to preliminary figures, household energy and fuel became 2.4% cheaper in February compared to the same month last year. Food cost 0.9% more than in February 2023, meaning that the increase slowed. An increase of 3.8% was recorded in January.
Compared to the previous month of January, the CPI rose by 0.4%, the preliminary data showed. The German government expects consumer prices to rise by 2.8% on average this year after 5.9% in 2023.
Economy Minister Robert Habeck expects wage growth to exceed the rate of inflation this year. The expectation is that employees will also spend the money and thus boost private consumption. Private consumption is an important pillar of the German economy.
However, Bundesbank President Joachim Nagel indicated he preferred a wait-and-see attitude toward rate cuts. "Even though the temptation may be great, it is too early to cut interest rates."
Inflation is on the retreat in both Germany and the eurozone, but price stability has not been reached.
The European Central Bank (ECB) is aiming for price stability in the eurozone in the medium term with an inflation rate of 2%. Since the summer of 2022, the euro currency guardians have been fighting against the at times significant rise in inflation with 10 interest rate hikes in a row.
Higher interest rates make loans more expensive, which can curb demand and counteract high inflation rates. However, because rising interest rates on loans also make investments more expensive, they can slow down the currently weakening economy. Calls for interest rate cuts have recently become louder.
