German Inflation Slows Sharply as Energy-Price Spike Fades

German inflation eased significantly, thanks largely to natural gas costs tumbling following their surge after Russia invaded Ukraine just over a year ago.

(Bloomberg) — German inflation eased significantly, thanks largely to natural gas costs tumbling following their surge after Russia invaded Ukraine just over a year ago.

Consumer prices in Europe’s biggest economy rose 7.8% in March compared with 9.3% in February, the statistics office said Thursday.

The result was more than the 7.5% median estimate in a Bloomberg poll of economists, but still offers some relief for the European Central Bank, whose officials have hiked rates by 350 basis points since last July to tackle the worst spike in prices of the euro era.

Many policymakers, however, fret that underlying inflation — which strips out volatile items like food and energy — remains elevated. Despite Spain’s headline gauge almost almost halving this month to 3.1%, its core measure only edged down to 7.5%.

While Germany doesn’t provide an underlying reading in its initial report, regional data suggest that core inflation accelerated to 5.7% in March from 5.4% in February, according to Bloomberg Economics. 

What Bloomberg Economics Says: 

“In the coming months, headline inflation should remain well below the rates recorded in autumn and winter. For the ECB, however, this is no reason to celebrate as underlying price pressures in Europe’s biggest economy are still worryingly strong. Core inflation likely reached a new historical high in March and might climb further until summer.”

— Martin Ademmer, economist. Click here for full REACT 

How the country-level figures feed through to the 20-nation euro zone will be revealed Friday, with analysts expecting the main measure of inflation to slow to 7.1% even as the core gauge ticks up to a record 5.7%.

Wages are a key factor that officials are monitoring for signs that price growth is becoming entrenched. Talks with workers in Germany’s public sector, who want a double-digit pay rise, ended without a deal overnight and will go to independent arbitration.

Chancellor Olaf Scholz’s government has implemented wide-ranging measures to cushion the blow of higher prices for gas and power. But while proving more resilient than expected after a rapid turn away from Russian fuel supplies, Germany is forecast to experience a mild recession in the six months through March.

“The decline in energy prices is now reflected in other prices with a time lag,” Economy Minister Robert Habeck said. “In the case of consumer prices, electricity and gas contracts, as well as food prices, it takes a little time for last year’s prices to grow out. But it shows we’re on the right path.”

For the ECB, battling inflation has been further complicated as the tensions gripping banks around the world threaten to hinder credit and curb economic growth.

Governing Council member Peter Kazimir said Wednesday that while the ECB should continue raising rates, it should maybe do so more slowly, citing a “real risk” of banks curbing lending in the wake of the recent financial-industry turmoil.

–With assistance from Kristian Siedenburg, Joel Rinneby and Petra Sorge.

(Updates with German economy minister in ninth paragraph.)

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