German Central Bank Issues Another Warning on Inflation

The Central Bank estimates that inflation will slow down to 2.8 percent this year. In its latest business cycle forecast, Germany’s central bank warned that the increase in consumer prices, also known as inflation, may subside more slowly than expected. This persistence is especially evident in the service sector, where rising wages and resulting cost pressures are significant factors.

Contractual wages and fringe benefits in Germany rose by 6.2 percent from the previous year in January–March. This increase was significantly higher than the 3.6 percent rise in wages seen in the previous quarter. The impact of these salary increases is most notable in the services sector.

The central bank’s forecast predicts a sharp rise in contractual wages this year, with continued strong growth in the following years. These increases in labor costs are expected to lead to higher food prices, especially in the coming year. Additionally, energy price inflation is expected to accelerate somewhat in the near future, according to the forecast.

The central bank’s new forecast also includes predictions for the German economy’s growth, estimating a 0.3 percent growth this year, 1.1 percent next year, and 1.4 percent in 2026. Inflation is expected to slow down to 2.8 percent this year, 2.7 percent next year, and 2.2 percent in 2026.

Germany’s status as the largest economy in Europe has a significant influence on the euro area’s consumer price index. Amid concerns about the slowdown in inflation, the European Central Bank (ECB) decided to lower its policy rates. Many economists predict that the ECB will further lower its key interest rates next fall if inflation continues to slow.

In its economic forecast, the ECB anticipates that inflation in the euro area will decrease to 2.5 percent this year, 2.2 percent next year, and 1.9 percent in 2026. The ECB’s price stability objective is to maintain inflation at two percent in the medium term. The euro area economy is expected to grow by 0.9 percent this year, 1.4 percent next year, and 1.6 percent in 2026, according to the ECB’s forecast.