January saw a notable decline in inflation rates across six major German states, indicating a potential resumption of the downward trend in national inflation and fostering optimism for a reduction in euro zone inflation. This preliminary data emerged on Wednesday, highlighting significant decreases across these economically influential regions.
In North Rhine-Westphalia, Germany’s largest state by population, inflation dropped to 3.0% in January, down from 3.5% in December. Similarly, Bavaria experienced a decrease to 2.9% from 3.4%, while Brandenburg’s rate fell to 3.7% from 4.5%. In Saxony, the rate declined to 3.5% from 4.3%, Baden-Wuerttemberg saw a decrease to 3.2% from 3.8%, and Hesse’s rate dropped significantly to 2.2% from 3.5% in the previous month.
This trend in the German states has drawn attention to the upcoming national inflation data, with Germany and France set to publish their figures ahead of the anticipated euro zone inflation data on Thursday. In France, EU-harmonized inflation also showed a decline, falling to 3.4% in January from 4.1% in December.
Economists, having polled by Reuters, are predicting a slight decrease in euro zone inflation to 2.8% in January from 2.9% in December. Joachim Nagel, a policymaker at the European Central Bank (ECB), expressed confidence on Tuesday, stating, “I am now convinced that we have tamed that greedy beast.”
The ECB’s significant interest rate hikes, the largest in the euro’s history, were instrumental in reducing inflation from double-digit figures. The bank is now expected to commence reducing borrowing costs starting in the spring.
In the German states, the decline in inflation has been primarily attributed to lower energy costs, which have balanced out the impact of terminating several anti-crisis policy support measures that previously contributed to higher inflation rates.
Deutsche Bank economists note that the end of energy price brakes, an increase in the VAT rate for gas, district heating, and restaurant food, along with a rise in the national carbon price, might collectively add 0.6 percentage points to January’s inflation figure.
Reuters-polled economists forecast Germany’s harmonized inflation to be at 3.2% in January, a decrease from December’s 3.8%. Sebastian Becker from Deutsche Bank cautioned about the potential for unexpected variations in the January data, due to uncertainties regarding the exact impact of the cessation of anti-crisis policy support measures on consumers.
