In Germany, inflation appears to be declining, helped by energy prices (apparently in March) and food prices (more evenly distributed throughout the year). However, for the time being, the rate of growth in prices for services and foodstuffs offsets any relief from the energy component. If today’s data from the euro area confirms this pattern, the ECB is likely to maintain its forecast for a further increase in borrowing costs in the second quarter of 2023, in addition to realizing the previously announced 50 bps increase at its March 16 meeting. In February, German inflation adjusted for EU data strengthened by as much as 9.3% year on year compared to 9.2% in January, while national core inflation remained stable at 8.7% year on year, as and in January. According to Reuters economists, inflation will fall to 9% and 8.5%, respectively. And energy prices fell to 19.1% year-on-year in February from 23.1% in January, based on the national consumer price index benchmark. Due to a number of different government interventions affecting energy prices, as well as statistical difficulties in measuring their impact, monthly changes in the energy price component are currently difficult to interpret.

However, in addition to monthly volatility, energy prices are currently the main factor driving inflation down. In contrast, food prices moved more dynamically, rising 21.8% in February after rising 20.2% in January. Moreover, indicators of structural inflation have further strengthened. Businesses continue to pass on past increases in the cost of goods and services to customers. As a result, core inflation is likely to remain consistently high for a little longer than core inflation. Price growth in the traditionally very stable component of rent remained at the level of 2% year on year, as in January. However, even this sub-indicator has been steadily growing throughout 2022 (before this year, the annual growth rate was closer to 1.5%). For the Eurozone, there is a risk of an unpleasant surprise. Analysts at Reuters forecast inflation to slow to 8.2% yoy in February from 8.6% in January.

* Mr. Salomon Fiedler is an economist at Berenberg Bank.