German price growth unchanged, sounding 'stagflation' warning

By Rachel More

BERLIN (Reuters) - German inflation remained flat in February for the second month in a row at 2.8%, preliminary data from the federal statistics office showed on Friday, despite forecasts suggesting a slight slowdown in price pressures in Europe's largest economy.

Analysts polled by Reuters had forecast a February reading of 2.7%, based on year-on-year data harmonised to compare with other European Union countries.

The data comes as the country steels itself for thorny coalition talks following a snap election, meaning many weeks of uncertainty at a time when the economy is in sharp need of a boost.

Increasing competition from abroad, high energy costs, still elevated interest rates and uncertain economic prospects have taken a heavy toll on the German economy, which contracted in 2024 for the second year in a row.

"Germany is in stagflation. Although industry is in a severe recession and unemployment is rising, inflation is stubbornly holding steady just above the 2% mark," said ZEW economist Friedrich Heinemann.

Still, the European Central Bank is expected to cut interest rates next week for the sixth time since June as inflation in the euro zone is now close to target and seen easing further in the coming months.

SERVICES INFLATION LOWER

Germany's core inflation rate, which excludes volatile food and energy prices, eased to 2.6% from 2.9% in January, as the inflation rate for services - which has been persistently high, driving up overall inflation - dropped below the 4% mark for the first time since October 2024, at 3.8%.

"In the recent past, the ECB was still concerned about price increases in the services sector. Europe's central bankers not only have reason to breathe a sigh of relief but also to stick to their chosen course," said VP Bank economist Thomas Gitzel.

Earlier Friday, figures from the statistics office showed that the millions of people on collective-bargaining contracts in Germany saw their wages rise in 2024 at a faster rate than inflation for the first time since 2020.

The office said this was mainly due to a government scheme allowing tax-free inflation compensation payments, introduced to ease the economic impact of the Ukraine war on consumers, and wage negotiations resulting in higher pay.

That inflation compensation scheme expired at the end of last year.

Meanwhile, German import prices rose more than expected in January, by 3.1% year on year, their steepest increase in almost two years.

With the German economy reliant on imports for many intermediary products and raw materials, the import price index has a delayed impact on overall inflation, indicating that price pressures could drag on.

(Reporting by Rachel More; editing by Matthias Williams and Ludwig Burger, William Maclean)