German headline inflation accelerates on higher energy prices in January, core rate eases

The German headline inflation accelerated in January to 1.7 percent from December’s 1.5 percent, in line with consensus expectations. A 3.4 percent rise in energy prices mainly drove the headline rate. On the contrary, the core inflation rate, which excludes energy and food, eased to 1.5 percent from 1.7 percent. The slowdown was mainly because of special effects and the reduction of VAT on rail tickets. Although the cut in ticket prices will ease the core rate by about 0.1 percentage points throughout the 2020, the underlying inflation is expected to continue its slight upward trend due to continued wage pressures, said Commerzbank in a research report.

In spite of the fairly considerable fall in the core inflation in January, the overall trend of slightly rising underlying inflation since the start of 2019 is unlikely to have come to an end. On the one hand, its fall in January can be explained by special effects: due to the mild weather, the retailers have started the winter sales unusually early this year, which is not adequately taken into account in the statistical seasonal adjustment.

However, the underlying inflation is likely to accelerate slightly in the months ahead. Companies are expected to pass on the increasing wage pressure to consumers, at least in part. Eventually, employment continues to grow, although slightly less dynamically in recent months, which, along with the current low unemployment rate, results in higher wage settlements. Collective wages are expected to rise nearly 3 percent this year, stated Commerzbank.

“The special effects observed in German consumer prices should have only limited impact on the harmonised consumer price index for the euro area as a whole. We therefore continue to forecast only a slight decline in core inflation from 1.3 percent to 1.2 percent”, added Commerzbank.