"Germany's Inflation Fog Clears" Lowest in Over 2 Years

Price stability in Germany, the largest economy in Europe, is becoming more evident. Germany, which has shown the slowest economic recovery among major countries as the "sick man of Europe," is escaping high inflation, leading to observations that the European Central Bank's (ECB) interest rate hike cycle has passed its peak.

On the 30th (local time), the German Federal Statistical Office announced that the Consumer Price Index (CPI) for October rose 3.8% compared to the previous year. This is a significant easing from the previous month (4.5%) and the lowest level in 28 months since June 2021 (2.3%). Germany's economic recovery was hampered by inflation triggered after the COVID-19 pandemic (3.8% in July 2021).

Although prices in Germany have stabilized, structural issues such as a decline in private consumption, a slowdown in trade due to reduced demand from China, its largest trading partner, and falling housing prices suggest that it will take time for a recovery phase to arrive. Jorg Kramer, chief economist at Commerzbank Germany, predicted, "Despite falling prices and wage increases, it will be difficult for private consumption to recover in the near term."

Germany's GDP in the third quarter of this year decreased by 0.1% compared to the same period last year. Although this was better than market expectations (-0.2%), it was the only contraction among major advanced countries. Germany recorded consecutive contractions in the fourth quarter of last year and the first quarter of this year, followed by zero growth in the second quarter.

Christine Lagarde, President of the European Central Bank (ECB), is holding a press conference after the monetary policy meeting held in Athens, Greece, on the 26th (local time). The ECB decided to keep key policy rates, including the benchmark interest rate, unchanged on this day. [Image source=AFP Yonhap News]

With price stability in Germany, the largest economy in Europe, there is an assessment that the EU's interest rate hike cycle has also peaked. The European Central Bank (ECB) held its benchmark interest rate steady at 4.5% on the 26th. This was the first pause after 10 consecutive hikes since July last year. The ECB took a big step (0.5 percentage point increase) for the first time in 11 years in July last year, followed by two consecutive giant steps (0.75 percentage point increases) in September and October last year. After that, it continued with three consecutive big steps before returning to baby steps (0.25 percentage point increase).

The ECB stopped raising rates based on the judgment that price pressures in major countries like Germany have significantly eased. The ECB stated, "If the current benchmark interest rate level is maintained long enough, the Governing Council's goal of timely returning inflation to the medium-term target of 2% will be achieved."

The European Union (EU) will release Eurozone inflation and GDP data at 7 p.m. Korean time on the 31st. The market expects the Eurozone (20 countries using the euro) consumer price inflation rate for October to fall to 3.1% from the previous month (4.3%). The peak a year ago was 10.6%. Although the absolute level still exceeds the target, experts evaluate that disinflation has become clear.

Other European countries are also showing signs of price stabilization. Spain's consumer prices in October rose by only 3.5% year-on-year, below expectations, and inflation rates in Ireland (6.4%) and Belgium (0.36%) also sharply slowed.

One foreign media outlet assessed that "the German economy is heading toward disinflation rather than a resurgence of inflation." However, it noted that energy risks remain due to the escalation of the Israel-Palestine conflict. The spread of the Israel-Palestine conflict following the Russia-Ukraine situation has caused international oil prices to rise, which could prolong the contraction phase of the German economy. The target inflation achievement is expected in the second half of next year.

Salomon Fiedler, an economist at Berenberg Germany, said, "While it cannot be completely ruled out that prices may rise again in December, Germany's inflation rate is gradually following a downward path and is expected to fall to 2.5% by the second half of next year."

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