German Inflation Down Less Than Forecast, Challenging ECB Stance

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German inflation slowed significantly less than expected in January, challenging the European Central Bank's view that consumer-price growth in the euro area will ease noticeably this year and preclude the need for tighter policy.

Prices rose 5.1% from a year ago under a European Union-harmonized measure, the Federal Statistics Office said Monday. That's well above the 4.3% forecast by economists in a Bloomberg survey, and comes after a reading of 5.7% in December. Energy was 20.5% more expensive, the data showed.

Earlier on Monday, Spain also reported inflation far above analysts' estimates. France will publish data on Tuesday, before figures for Italy and the 19-nation euro area come out on Wednesday.

Price pressures in the euro area were supposed to start abating this year, after being pushed to fresh records in 2021 amid supply-chain disruptions and a spike in energy costs. ECB officials meeting this week will now need to defend their slow exit from pandemic stimulus amid signs that inflation could remain elevated for a while yet.

What Bloomberg Economics Says...
“Stronger than expected inflation for Germany means we now see price growth of at least 4.7% in the euro area for January. That compares with a median estimate of 4.4% in a Bloomberg survey of economists. Inflation is likely to top 5% on average in 1Q, exceeding the ECB's 4.1% forecast by a wide margin.”
--Maeva Cousin, senior economist. For full react, click here

Meanwhile, traders are ramping up wagers on rate increases from the ECB, contradicting policy makers who have pushed back against the idea of raising borrowing costs this year. Money markets now see a quarter-percentage point of increases by year-end, which would take the deposit rate to minus 0.25%.

“Hopes for a significant fall in inflation at the beginning of the year have not been fulfilled,” ZEW economist Friedrich Heinemann said after the German data were published. “Companies will keep passing on the much higher procurement costs to end consumers by adjusting prices. The year 2022 started inflationary and will remain so.”

The slowdown in German inflation in January reflects the expiration of base effects from a temporary sales-tax cut, which added more than 1 percentage point to the annual rate in the second half of last year. Still, the Bundesbank predicted in its monthly report last week that price growth at the beginning of 2022 “is likely to remain extraordinarily high.”

“We need to ask ourselves if this is a permanent inflation development -- we need to keep expectations anchored that prices will remain stable,” German Finance Minister Christian Lindner said on German television channel ARD earlier on Monday.