Inflation in Europe’s largest economy Germany has fallen back sharply over the past four weeks, after overshooting the European Central Bank’s target in February. This makes a change in monetary policy less likely.
Prices rose 1.6 percent compared with March 2016, figures from federal statistics authority Destatis showed, a 0.6-percentage-point decrease from February’s figure.
The European Central Bank (ECB) prefers a different yardstick, the Harmonised Index of Consumer Prices (HICP). By that measure, German inflation was lower still, reaching only 1.5 percent.
The inflation data drove the euro back to nine-day lows against the dollar on Thursday, to $1.0731.
Less pressure on central bank
The latest figures are likely to ease pressure on the central bank to raise interest rates, a move German economists and politicians urged last month after inflation jumped past the ECB’s target of close to but below 2.0 percent.
For their part, ECB policymakers argued they should continue their policies of low rates and cash injections into the economy, choosing to “look through” the spike in price growth.
Higher inflation across the 19-nation eurozone since December has been a temporary effect of higher energy prices this year compared with the first months of 2016, top central bank officials believe. Meanwhile, core inflation – excluding volatile items like energy and food – remains sluggish.
“Today’s German data and tomorrow’s eurozone data should help the ECB in getting rid of rate hike expectations,” said economist Carsten Brzeski of ING Diba.
Wages are crucial
“We suspect that underlying price pressures will remain very subdued in future. There are still few signs of strong upward pressure on wage growth,” analyst Jennifer McKeown of Capital Economics commented on regional inflation figures released earlier Thursday.
Workers are likely to spend more and power growth when they have more cash in their pockets, making higher salaries “the linchpin of a self-sustained increase in inflation,” ECB President Mario Draghi said earlier in March.
Economists at the Frankfurt-based institution expect headline inflation to reach 1.7 percent in 2017 and 1.6 percent in 2018.
The ECB next meets on April 27, before the final round of the French presidential election. A potentially contentious run-off could also encourage the bank to act with caution.
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