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Inflation in Germany eases due to lower energy prices

Inflation slowed in Germany in March as energy prices fell, official data showed Thursday, adding to hopes that the eurozone was past the worst of the price increases.

Published: 30 March 2023 14:56 CEST

German supermarket groceries inflation

Groceries on a conveyor belt at a German supermarket. Photo: picture alliance/dpa | Sven Hoppe

Price growth in Europe’s largest economy eased to 7.4 percent year-on-year this month, according to preliminary data from federal statistics agency Destatis.

In January and February, Germany’s inflation rate had held steady at 8.7 percent.

While food prices continued to show “above-average growth” this month, the increase in energy prices had “slowed considerably” compared with March 2022, when Russia’s invasion of Ukraine sent energy costs surging, Destatis said.

Analysts surveyed by financial data firm FactSet had expected a bigger drop in inflation, at 7.3 percent.

The latest figures showed that “the pass-through of higher energy prices into higher consumer prices is starting to lose strength,” said ING economist Wouter Thierie.

Moreover, pressures on global supply chains have further eased in recent months to pre-pandemic levels, which is also dampening inflation.”

With inflation across the eurozone still well above the European Central Bank’s two-percent target, the bank is expected to keep raising interest rates.

The size of the ECB’s next rate hike remains unclear, however, especially after recent turmoil in the banking sector highlighted the pain of higher borrowing costs on the economy.

Following this month’s hike by half a percentage point, many observers see the ECB downshifting and opting for a smaller rate rise at the next meeting in May.

READ ALSO: Why 2023 will be a better year to grow your savings in Germany

“In the coming months, the inflation rate is likely to ease somewhat due to the effect of energy prices, but the price pressure on non-energy goods will probably persist,” said LBBW economist Jean-Oliver Niklasch.

For Germany’s inflation rate, “we hope that by the end of the year there will be at most a three in front of the decimal point,” he added.

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Scholz walks tightrope on trade and politics in China

Scholz touched down in the southwestern megacity of Chongqing on Sunday morning, Chinese state broadcaster CCTV said, accompanied by a large delegation of ministers and business executives.

As Western allies are cranking up pressure on Beijing, Scholz is expected to underline that Germany remains committed to doing business with the world’s second-largest economy and rejects US-led calls for “decoupling”.

His friendly overtures towards China risk sparking ire among Washington and EU partners, which have been pushing back against Beijing’s heavy subsidies for industries.

“China remains a really important economic partner,” Scholz told journalists on Friday, adding that he would try to level the playing field for German companies in China.

On the geopolitical front, Scholz will also use his visit to persuade Chinese President Xi Jinping to exert his influence to rein in his Russian counterpart Vladimir Putin and help bring an end to the war in Ukraine.

“Given the close relations between China and Russia, Beijing has the possibility to exert its influence on Russia,” said a German government source in Berlin.

The three-day tour through Chongqing, Shanghai and Beijing is Scholz’s second trip to China since he took office.

His first in November 2022 took place under intense scrutiny, as it came swiftly after Xi strengthened his grip on power, and marked the first post-pandemic visit by a G7 leader to China.

Stung then by painful supply chain disruptions during the health crisis as well as by China’s refusal to distance itself from Russia despite Moscow’s invasion of Ukraine, Western allies had been scrambling to reduce their reliance on Beijing.

‘Position of strength’

Scholz’s visit comes as many of Germany’s Western allies confront China on a range of trade issues.

A slew of probes into state aid for Chinese solar panels, electric cars and wind turbines are ongoing in Brussels.

The United States is meanwhile investigating national security risks posed by Chinese technology in cars.

With tensions rumbling over Taiwan, US President Joe Biden this week made defence pledges to Japan and the Philippines, while describing behaviour by Beijing in the South China Sea as “dangerous and aggressive”.

Two days before his visit, Scholz held talks with France’s President Emmanuel Macron, whose office said the leaders “coordinated to defend a rebalancing of European-Chinese trade relations”.

But China is a vital market for Germany, where many jobs depend directly on demand from the Asian giant.

Both economies also badly need a boost.

The German economy shrank by 0.3 percent last year, battered by inflation, high interest rates and cooling exports, and for this year, the economy ministry expects just an anaemic growth of 0.2 percent.

Beijing has set an annual GDP growth target of around five percent for this year, but exports plunged more than expected last month.

German MPs and analysts urged Scholz to take a firm line. The Green party’s Deborah Duering warned Scholz against viewing China just as an economic opportunity.

“Those who ignore long-term risks for short-term profits risk repeating the mistakes of the past, misguided Russia policy,” said Duering, in reference to past dependency on Moscow for cheap energy supplies.

Max Zenglein of the Mercator Institute for China Studies said Germany should not hesitate to be more assertive.

“As countries such as the USA and Japan are positioning themselves much more sharply against China, Germany has an important role to play,” he said, adding that Germany was “in a position of strength”.

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