German Inflation Falls to Lowest Level since Mid-2021

Despite the end of the energy price cap, a policy that was introduced to keep energy bills affordable and has been scrapped from Dec. 31, 2023, and an increase of the CO2 price from 30 euros to 45 euros (48 U.S. dollars) per tonne affecting fossil fuel prices, energy prices in January dropped 2.8 percent year-on-year and had a "dampening effect on the rate of inflation," Destatis said.

Although the rise in food prices has slowed since April last year, food in January was still 3.8 percent more expensive year-on-year, according to the figures. German consumers were paying significantly higher prices for sugar, jam, honey, and other confectionery but also for fruit and vegetables.

On top of high food prices, meals in restaurants in Germany are charged at the regular value-added tax rate of 19 percent since the beginning of the year. During the COVID-19 pandemic and the energy crisis, a reduced rate of 7 percent was applied.

"The loss of purchasing power due to high inflation in 2022 and 2023 continues to weigh on private households," the German Institute for Economic Research (DIW Berlin) said at the end of January. As a result, this was also affecting consumer spending, which was "important for the German economy."

Although annual inflation in Europe's largest economy dropped to 5.9 percent last year, it was the second-highest figure since the country's reunification. For 2024, DIW Berlin is expecting inflation to fall to 2.4 percent, before returning to the 2 percent target of the European Central Bank (ECB) in 2025.

To bring inflation down again, the ECB has raised interest rates to a historic high. After the most recent interest rate meeting on Jan. 25, the bank's President Christine Lagarde said it was "premature to discuss rate cuts."

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