German food and energy prices fall, inflation sinks to 2.2%

Germany's inflation rate dipped to 2.2% in March compared with the same month last year, figures published on Friday confirmed — a decline exacerbated by falling food and energy prices.

The rate was as low as it was last in May 2021 — before Russia's war in Ukraine sent fuel and grocery prices spiraling upward.

How the numbers work out

Inflation had already fallen markedly in February to 2.5%, compared with January when it stood at 2.9%, the data from Germany's Federal Statistics Office, Destatis, said.

"The inflation rate has weakened again," said Destatis President Ruth Brand. "The price situation for energy and food dampened the inflation rate for the second month in a row."

In March, food was cheaper for consumers for the first time compared with the previous year, down 0.7%, for the first time since February 2015. 

Vegetables, in particular, became cheaper with prices plummeting by more than 20%. A similar drop was seen for sunflower and rapeseed oil. There was also a marked fall, of 5.5%, in the cost of dairy products.

Some food prices went in the opposite direction with fish and seafood prices up 0.9%, and fruit, jam, and confectionery rising by 8.4%.

Despite the abolition of a price brake and a rise in the carbon levy on fuels, energy prices were 2.7% lower than the previous year. For households, this was more pronounced with a drop of 4.6%.

In contrast, the inflation rate for products excluding food and energy for March was 3.3% — bringing inflation back into positive territory. Destatis cited flight tickets (+21.2%), package tours (+6.8%) and clothing (+3.6%)  as examples.

What does it all mean?

The fall in inflation for Europe's largest economy will feed into future decisions of the European Central Bank (ECB) on interest rates.

The ECBN on Thursday decided not to cut interest rates, which were hiked 10 times since mid-2022 in an attempt to tame soaring inflation. 

However, the bank signaled that a cut to its refinancing rate of 4.5% might be on the table in June. 

ECB President Christine Lagarde said "it would be appropriate to reduce the current level of monetary policy restriction," if future data confirmed that inflation in the eurozone was beaten.

While higher rates are a blunt tool to help tamp down inflation, raising the cost of borrowing to buy things, they can also cool demand too much and slow growth.

Dekabank chief economist Ulrich Kater said it appeared that the major wave of inflation is over. "The outright inflation panic, which quite rightly prevailed in parts of the population, is behind us," Kater told the DPA news agency.

However, the chief economist of Germany's state-owned KfW development bank said the outlook was not completely rosy for consumers with a hike in Value Added Tax (VAT) on gas supplies on the horizon.

"We can expect a price surge in gas and heating supplies due to the end of the VAT reduction," possibly in April, he said.

VAT on gas had been temporarily lowered in light of the gas price jump that resulted from the Kremlin's invasion of Ukraine.

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rc/wd (AFP, dpa)