Inflation is expected to fall sharply in March due to lower energy prices, according to preliminary estimate data from Germany’s six economic states on Wednesday.
The inflation rate in the state of Brandenburg and Baden-Württemberg fell to 7.8 percent year-on-year. Also, in Bavaria, Hesse, and North-Rhine Westphalia, the inflation rate decreased to 7.2, 7.1, and 6.9 percent, respectively, and in the eastern state of Saxony, the inflation rate decreased to 8.3 percent. In February, the inflation rate in these six states was between 8.3 percent and 9.2 percent. According to economists at ING, inflation in Germany and the eurozone is no longer the result of a supply shock, but a demand-side issue. Economists of this financial institution said that not only the price of energy and primary goods are passed on to consumers, but also the increase in profit margins in some companies has also added to the inflationary pressures. Given the developing growth-price and wage-price spirals in Germany, core inflation will remain stubbornly high.
The European Central Bank will continue to raise interest rates, at least through the summer, before entering a long period of higher interest rates. Labor forces are increasing their demands and wages and gaining bargaining power in a very tight labor market. Germany’s public sector wage talks failed to reach an agreement this week, although employers offered wage growth of roughly 6 percent a year for 2023 and 2024. Unions are in a stronger position, so we continue to assume that final wage growth will be higher than forecasts, said Christian Schulz, an economist at Citigroup Investment Bank. This directly increases inflation; Because local authorities have to increase administrative costs and health insurers donate higher contribution rates to pay for higher costs. While headline inflation is easing, core inflation is expected to remain elevated.