UPDATE 2-German inflation eases less than expected in March

by DailyBriefers
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BERLIN (Reuters) – Inflation eased significantly in Germany in March on the back of lower energy prices but was above forecasts, adding pressure on the European Central Bank to further tighten its monetary policy.

German consumer prices, harmonised to compare with other European Union countries, rose by a more-than-anticipated 7.8% on the year in March, preliminary data from the federal statistics office showed on Thursday.

Compared to February, prices increased by 1.1%, it added.

Analysts had expected harmonised data to increase by 0.8% on the previous month and grow by 7.5% on an annual basis.

According to non-harmonised standards, German consumer prices rose 7.4% on the year in March and 0.8% on the month. This follows an inflation rate of 8.7% in February and January.

Food prices continued to show above-average growth. They were up 22.3% year-on-year.

The decline in the inflation rate was entirely driven by a slowdown in energy prices, which rose only 3.5% compared with March 2022, when energy prices soared following Russia’s invasion of Ukraine.

Apart from this base effect, which is due to the high index level of March 2022, the measures included in the German government’s third relief package also contributed to the decline in headline inflation, the statistics office said.

Inflation is now dropping rapidly across the euro area as high energy costs get knocked out of year-earlier figures, but underlying price growth, which filters out volatile food and energy prices, appears to be stubbornly high.

This is raising worries at the European Central Bank that sky-high energy costs have seeped into the broader economy via second-round effects, making it difficult to root out because it is fuelling cost increases across the board.

While energy prices have fallen back to their pre-war levels, ECB board member Isabel Schnabel warned on Wednesday that the energy impact may not drop out of inflation completely because firms have boosted margins and workers are increasing their wage demands.

Europe’s labour market is so tight that workers have gained bargaining power, and wage growth is now at between 5 and 6%, its highest in decades.

Still, the ECB sees overall inflation under 3% by the end of the year and hopes this rapid fall will also moderate wage demands, easing overall pricing pressures.

Reporting by Maria Martinez, Balazs Koranyi and Miranda Murray, editing by Friederike Heine and Bernadette Baum

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