Germany's Inflation Rate Slows for the First Time in 6 Months... Growing Expectations for Eurozone Inflation Slowdown

The 10-Year Government Bond Yield Rises on Fed Minutes Impact... Highest Since May 2019 'Plus Imminent'

[Photo by Reuters-Yonhap News]

[Asia Economy Reporter Park Byung-hee] As Germany's consumer price inflation rate fell for the first time in six months, expectations are spreading that Eurozone inflation has reached its peak.

The German Federal Statistical Office announced that Germany's December Harmonized Index of Consumer Prices (HICP) inflation rate was 5.7%. This is a 0.3 percentage point decrease from 6.0% in November. This is the first decline in the HICP since it dropped from 2.4% in June last year to 2.1% in July. The HICP refers to the inflation rate calculated based on the European Central Bank (ECB) standards.

However, the Federal Statistical Office also reported that the December Consumer Price Index (CPI), calculated independently, rose by 5.3%, marking the highest level since June 1992. The CPI inflation rate increased by 0.1 percentage points from 5.2% in November.

As prices in Germany, the largest economy in the Eurozone, show signs of stabilization, expectations for price stability across the Eurozone are growing. Earlier, the Bank of France announced on the 4th that the December consumer price inflation rate remained steady at 3.4%, the same as in November, suggesting that inflation in France and the Eurozone appears to have nearly peaked.

Eurostat, the statistical office of the European Union (EU), will release the December Eurozone CPI inflation rate on the 7th. Analysts expect it to slow to 4.7% from 4.9% in November.

Germany's annual HICP inflation rate for last year was 3.2%, a significant increase from 0.4% in 2020. The CPI also surged from 0.5% in 2020 to 3.1% last year.

Trend of German 10-Year Government Bond Yields

The German Federal Statistical Office explained that there are several reasons for the sharp rise in prices since July last year.

Primarily, it cited a base effect caused by price declines following the economic slowdown due to the COVID-19 pandemic in 2020. It also noted that while value-added tax (VAT) was reduced to prevent economic downturn in 2020, an additional tax on carbon dioxide emissions was imposed starting January 2021, contributing to price increases. Furthermore, it added that the base effect from the VAT reduction will disappear from January this year, which could slow the upward trend in prices.

Although expectations for price stability are spreading, Germany still maintains that the ECB should begin tightening monetary policy.

The German central bank significantly raised its forecast for Germany's inflation rate in 2022 to 3.6% last month, doubling the 1.8% forecast presented in July last year. The central bank also projected inflation rates of 2.2% for both 2023 and 2024, exceeding the ECB's monetary policy target.

J?rg Kr?mer, an analyst at Commerzbank, said, "Prices that rose due to special reasons will definitely fall in the new year," but added, "Inflation risks are being revised upward not only in Germany but across the Eurozone, and it is time for the ECB to stop stimulus measures."

Last month, the ECB also sharply raised its forecast for Eurozone inflation in 2022 from 1.7% in September to 3.2%. Although it also revised upward the 2023 inflation forecast, it expects inflation to fall below the ECB's monetary policy target. This reflects a contrasting view compared to Germany. The ECB's newly presented inflation forecast for 2023 is 1.8%, up 0.3 percentage points from the September forecast last year.

On the day, the yield on Germany's 10-year government bonds rose, nearing a positive turnaround. Although the HICP inflation rate slowed, the market reacted more sensitively to the still-rising CPI calculated independently. The minutes released by the U.S. Federal Reserve (Fed) the day before, indicating a strong intention to implement tight monetary policy, also appeared to have an impact. After the Fed's minutes were released, global bond yields rose sharply.

The yield on Germany's 10-year government bonds rose to -0.031%, marking the highest level since May 2019.

This content was produced with the assistance of AI translation services.