Inflation slows significantly in Germany

Germany experienced a decrease in inflation in January, as consumer prices increased by 2.9 percent, down from December's 3.7 percent, according to the government's statistical office Destatis.

The federal agency said the shift was partly driven by falling energy prices, while the rising cost of food also eased. It noted that it was the slowest pace of change since June 2021, when the consumer price index rose by 2.4 percent.

Germany's full-year inflation rate for 2023 stood at 5.9 percent, marking a notable decrease from the 6.9 percent recorded in 2022, yet still the second-highest rate since the country's reunification more than three decades ago.

Despite the downward trajectory of inflation in Europe's largest economy, the European Central Bank, or ECB, may not perceive it is sufficient to warrant an immediate lowering of borrowing costs. Most economists predict Germany's inflation rate will drop further this year, reported Deutsche Welle News.

The ECB decided on Jan 25 to keep key interest rates unchanged in its ongoing effort to achieve the eurozone economy's 2 percent inflation target. Average inflation for the eurozone dropped to 2.9 percent at the end of last year.

The ECB raised interest rates multiple times in 2022 and 2023 as a means of combating inflation. While higher interest rates can help restrain demand and counteract high inflation rates, they can also pose challenges to the economy as credit-financed investments become more costly.

According to ECB President Christine Lagarde, the first reduction in interest rates could occur in the summer, contingent upon the latest economic data supporting the move.

The Munich-based IFO Institute economic research group revealed on Wednesday a significant number of consumer-facing companies in Germany expect to raise prices in the coming year.

"Inflation is therefore likely to fall only slowly in the coming months," said the institute's economic research director, Timo Wollmershauser.

Price increases have been attributed to the consequences of the Russia-Ukraine conflict, which began in February 2022 and led to significant spikes in the cost of food and energy. Supply chain disruptions and production issues caused by the novel coronavirus pandemic were also major factors.