German inflation surge signals persistent pressure

Germany's inflation rate rose unexpectedly to 2.6 percent in December, driven by higher food costs and a slower decline in energy prices, official figures show.

The inflation rate climbed from November's 2.4 percent, adding pressure to Germany's economic challenges, the federal statistics agency Destatis reported.

The agency revealed a 1.7-percent year-on-year decline in energy prices for December, alongside a 2-percent rise in food costs.

Core inflation, which is seen as the most reliable measure, rose to 3.1 percent in December from 3 percent in November, continuing its upward trend from September's 2.7 percent.

Goods inflation jumped to 1.1 percent from September's 0.3 percent, while service-sector inflation remained high, at 4.1 percent in December, up from November's 4 percent.

The unexpected inflation data rattled financial markets, pushing up German bond yields, reported Euronews.

The benchmark 10-year Bund, or government bond, yield reached 2.45 percent, its highest since early November, while the two-year Schatz yield rose 3 basis points, to 2.2 percent. Investors saw the inflation data as reducing the chances of aggressive ECB rate cuts soon.

"Last year ended with unpleasant news on the inflation front," said Joerg Kraemer, Commerzbank chief economist, who warned that inflation remains a persistent problem. He predicted similar high rates in January, citing upcoming increases in CO2 emission costs and insurance services.

Carsten Brzeski, ING's global head of macro, said: "The summer celebrations over successfully conquering the inflation monster were premature."

He added that the data brought back "the spectre of stagflation to the European Central Bank".

Germany's inflation figures, released a day before eurozone data, serve as a crucial indicator for economists.

The European Central Bank, or ECB, will consider the inflation figures at its next policy meeting on Jan 30.

Analysts expect eurozone inflation reached 2.4 percent in December, up from 2.2 percent in November.

Germany recorded its highest inflation rates since its 1990 reunification, at 6.9 percent in 2022 and 5.9 percent in 2023, driven by COVID-19 pandemic supply-chain disruptions and the shift away from Russian gas after the outbreak of the Russia-Ukraine conflict. Despite falling energy costs, inflation has remained persistently high.

The ECB will likely overlook the recent inflation uptick as long as pressures are forecast to decline in 2025, Brzeski said.

The ECB forecasts inflation will reach its 2-percent target this year, down from double-digit levels seen after the Russia-Ukraine conflict began. The highest recorded annual inflation rate for the eurozone was 10.6 percent in October 2022.

"The ECB's target will be missed by a wide margin," said Ralf Umlauf, senior economist at Helaba. "Expectations of ECB interest rate cuts should not be given any new impetus."