German Inflation Slows Unexpectedly in January

Germany’s inflation rate cooled in January, marking its first decline in several months. The slowdown offers a welcome relief for consumers and strengthens the case for further interest rate cuts across the eurozone.

According to Germany’s federal statistics agency, Destatis, the country’s annual inflation rate dropped to 2.3% in January, down from 2.6% in December. This decline caught analysts off guard—FactSet had projected that inflation would remain unchanged.

Even more notably, core inflation—which excludes volatile food and energy prices and is closely monitored by the European Central Bank (ECB)—fell to 2.9% from 3.3% the previous month.

The decline in German inflation is significant because the ECB has been aggressively raising interest rates since mid-2022 to combat soaring inflation across the eurozone. While these hikes helped control inflation, they also slowed economic growth, with the eurozone recording zero growth at the end of 2024.

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Recently, the ECB has shifted toward cutting rates to ease pressure on businesses and consumers. Thursday’s rate cut—the fourth consecutive reduction—suggests that the ECB is committed to this policy shift.

For the ECB, this unexpected dip in German inflation is a positive signal. If inflation remains on a downward trend, it will likely pave the way for more rate cuts in the coming months, making borrowing cheaper and potentially boosting economic activity.

Carsten Brzeski, an economist at ING Bank, called the drop “a welcome surprise for both consumers and the European Central Bank”, reinforcing expectations that the ECB will continue reducing rates.

While Germany saw a decline, France’s inflation—the second-largest economy in the eurozone—rose slightly to 1.4% in January, up from 1.3% in December, according to INSEE, the French statistics institute. Despite this minor increase, the overall eurozone trend suggests that inflation pressures are easing, which could allow the ECB to continue lowering borrowing costs without risking another inflation spike.