German inflation set to head lower in December, but core index remains firm

By Geoffrey Smith

Investing.com -- German headline inflation is set to fall further in December, thanks to government measures to ease household energy bills, but analysts warned that underlying inflation remained uncomfortably high.

Preliminary numbers for December from the country's largest federal states pointed to core inflation remaining at more than twice the European Central Bank's 2% target and showed little improvement at the end of the year.

The state of North Rhine-Westphalia - Germany's largest by population and economic output - said annual inflation slowed to 8.7% in December from 10.4% in November and a peak of 11% in October, as rebates on household fuel bills caused a 12.6% drop in energy prices during the month, which pushed the overall consumer price index down by 1.0% from November.

However, food prices - the largest part of many families' monthly outgoings - rose another 0.5%, leaving them up 13.8% on the year.

More worryingly, the overall CPI without volatile food and energy prices rose 1.0%, pushing the annual 'core' measure of inflation up to 4.9% from 4.6%. Oliver Rakau, an economist with Oxford Economics, said via social media that the latter number "will be more important for the ECB."

At her last press conference of 2022, ECB President Christine Lagarde had struck a hawkish tone, warning that underlying inflation was likely to stay strong despite a decline in the annual headline numbers as last year's sharp increases in energy prices start to pass out of the calculations.

Figures from other large states are due in the course of the European morning, with federal statistics office Destatis set to release a preliminary number for Germany as a whole at 08:00 ET (13:00 GMT).

Analysts expect a 0.3% decline in prices nationwide for December and a drop in the annual headline rate to 9.1% from 10.0% in November.