Inflation in Germany Shows Signs of Abatement
Rebound from 2023’s Highs
Inflation in Germany has exhibited a significant decline in recent months, offering a glimmer of hope for consumers who have been grappling with rising prices. According to the latest figures released by the Federal Statistical Office, inflation measured as the annual rate of change in the Consumer Price Index (CPI) eased to 2.3% in January 2025, marking the first drop after three consecutive upward revisions. This represents a notable departure from the 2.6% inflation rate recorded in December 2024. On a month-over-month basis, consumer prices declined by 0.2% in January.
Factors Contributing to the Downturn
A major factor behind the moderation in inflation is the stabilization of food prices, which had previously been a key driver of inflation. Foodstuffs, on average, cost only 0.8% more in January compared to the same month last year, a significant slowdown from the 2.0% increase observed in December.
However, certain food items have seen pronounced increases in price. Butter, for instance, has witnessed a sharp surge of 32.6%, while dairy products and eggs have experienced a modest 2.7% rise in price. In contrast, vegetable prices have declined by 2.3%, and meat prices have remained largely unchanged.
Energy costs have also played a role in the easing of inflation, registering an average 1.6% reduction compared to the previous year. Both fuel (0.1% decrease) and household energy (2.5% decrease) have become more affordable. Consumers have benefited from lower prices for light heating oil (1.2% decrease) and electricity (3.6% decrease).
Offsetting Factors and Persistent Price Pressures
Despite these positive developments, some components of the CPI continue to exert upward pressure on overall inflation. Services, in particular, have seen a notable 4.0% increase, exceeding the overall rate. Insurance premiums have risen sharply by 9.9%, while auto maintenance and repair costs have climbed 5.7%. Restaurant dining has also become more expensive, with prices increasing by 4.7%. Net cold rents have also increased modestly by 2.0%.
Public Perception and the "Inflation Illusion"
While inflation has moderated in recent months, it remains a significant concern for many consumers. The sharp price increases experienced in 2023 and early 2024 have left a lingering impact on public perception. A survey conducted by the Institute for Economic Research (IW) revealed that, on average, respondents estimated the inflation rate in 2024 to be 15.3%, a significant overestimation of the actual 2.2%.
This "inflation illusion" highlights the gap between official statistics and individual experiences. Approximately half of the respondents in the IW survey expressed skepticism about the official inflation figures, indicating a widespread belief that consumer prices are rising faster than reported.
Outlook for the Future
Economists anticipate that inflation will remain elevated above the 2.0% target in the coming months. However, the overall trend is expected to be one of gradual moderation. For the full year 2025, economists project an average inflation rate of slightly above 2%, similar to the level observed in 2024.
