EconomyGermany reports higher than expected inflation

Germany reports higher than expected inflation


German inflation fell less than expected in March despite a steep drop in energy costs, curbing hopes of a rapid easing in wider price pressures across the eurozone.

The 7.8 per cent year-on-year rise in harmonised German consumer prices compared with the previous month’s rate of 9.3 per cent, but was higher than the 7.5 per cent forecast by economists polled by Reuters.

The figures came hours after Spain’s annual inflation rate almost halved to 3.1 per cent for March, from 6 per cent the previous month.

The European Central Bank is considering whether to pause interest rate increases when it next meets in May. Eurozone inflation numbers are out on Friday.

German government bonds sold off after the country’s inflation figures were published. Yields on interest rate-sensitive two-year debt rose 0.08 percentage points to 2.7 per cent as investors bet that borrowing costs in the eurozone would have to rise further.

The main factor in the fall in the German consumer price index was a drop in energy inflation from 19.1 per cent in February to 3.5 per cent in March, according to Destatis, the federal statistical agency.

This was partly offset by a slight acceleration in food inflation to 22.3 per cent and services price growth to 4.8 per cent.

But the 3.1 per cent year-on-year rise in harmonised Spanish consumer prices was below consensus estimates of a 4 per cent increase.

Spain served as a leading indicator during the gas-driven rise in prices in Europe last year, as its energy prices responded faster to wholesale market moves than other countries.

However, Spain’s core consumer price inflation — which excludes energy and fresh food prices and is seen as a better indicator of underlying price pressures — remained stubbornly high at 7.5 per cent year on year.

The ECB has raised interest rates swiftly in response to a surge in inflation over the past year, raising its benchmark deposit rate by 3.5 percentage points to 3 per cent.

Some members of the ECB’s governing council have called for the bank to adopt a more cautious approach after raising interest rates by half a percentage point this month.

The turmoil in the banking sector has also opened up the prospect of a potential credit crunch that could slam the brakes on both inflation and growth in the coming months.

However, some council members argue that the ECB needs to discount the sharp swings in energy prices and focus on underlying price pressures.

Isabel Schnabel, the most hawkish member of the ECB executive board, told an event in Washington late on Wednesday that core inflation had proved more sticky than expected and this “causes some headaches for central bankers”. 

Additional reporting by George Steer



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