Source: Tradingview

The delated January estimate of German inflation was released on Thursday, revealing a gradual decrease in inflation without offering any relief. The annual headline inflation edged higher to 8.7%, a slight increase from 8.6% in December. For the ECB, Thursday’s reading of the German headline inflation shows how slow and gradual the disinflationary process in the euro zone will be.

The monthly increase of 1.0% indicates that inflationary pressures are far from abating, reversing a 0.8% decrease in December, when a federal one-off payment to cover the monthly instalment for gas and heat for all households and small- to medium-sized businesses came into effect, as such pressuring the inflation down.

Meanwhile, the annual HICP measure came in at 9.2% vs 10% expected, and a decrease from 9.6% in December. German inflation slowed in January to the lowest level in five months thanks to further government support to ease the pressure on households from soaring energy costs.

Publication of Germany’s inflation data was delayed last week because of “an unexpected technical problem”, which the federal statistical agency said was linked to the change of its base year for price statistics from 2015 to 2020. That probably helps to explain why the HICP annual inflation rate moved in the opposite direction.

Interpreting the data is complicated by regular re-pricings of households’ energy contracts and number of relief measures from the government. There was also an update to the consumer-price basket that Destatis uses for its calculations. Because of that change, the agency didn’t publish a breakdown of the separate components.

The German statistical office did not provide Eurostat with its numbers last week, so the impact of this on the first eurozone inflation estimate remains to be seen. However, it is likely that the initial estimate of 8.5% YoY will be revised upward slightly when final figures are published on the 23rd of February.

The path to lower inflation rates will not be straightforward, as it is currently being driven by lower energy prices and government interventions rather than a broader disinflationary process. The ECB has noted that the disinflationary process in the eurozone will be slow and gradual and is focusing on core inflation and projections as a better indicator of inflation.

Policymakers are worried that underlying price pressures are stubborn as core inflation remained at a record 5.2% in January and could ignite a wage-price spiral, which could require even higher interest rates.

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