Germany’s Inflation Cools, but Core Rate Signals Persistent Concerns
Preliminary data released Tuesday by the Federal Statistical Office reveals a significant deceleration in Germany’s annual inflation rate for December 2025. The consumer price index is projected to reach 1.8%, a considerable drop from November’s 2.3%, suggesting a potential stabilization of price pressures after a period of volatility. Consumer prices are expected to have remained unchanged month-on-month in the final month of the year, reflecting a fragile equilibrium in the market.
While the headline inflation figure offers a veneer of progress, a closer examination reveals simmering underlying concerns. The ‘core inflation’ rate – a more reliable indicator excluding volatile food and energy prices – is forecasted to have retreated slightly from 2.5% in November to 2.4% in December. This figure remains substantially above the European Central Bank’s (ECB) target of 2%, raising questions about the sustainability of the current disinflationary trend and potentially limiting the ECB’s room for maneuver on interest rate cuts.
The deceleration in headline inflation is primarily attributed to a decrease in energy prices, which were 1.3% lower compared to December 2024. While welcome, this doesn’t negate the broader economic picture. The continued price increases in food (0.8%) and, notably, services (3.5%) suggest inflationary pressures are becoming ingrained within the German economy. The elevated service sector inflation points to potential wage-price spirals – a scenario policymakers are keen to avoid.
Economists are interpreting the data with caution. While the headline numbers may ease political pressure on the Social Democratic-led coalition government, which has faced criticism for its handling of the cost-of-living crisis, the persistent core inflation rate reinforces anxieties about long-term price stability. The government’s fiscal policy, particularly its ongoing energy subsidies and social welfare programs, is now under increased scrutiny as potential contributors to inflationary pressures, particularly if they are perceived as hindering the ECB’s inflation-fighting efforts. The data is likely to fuel debate regarding whether a more assertive fiscal tightening is necessary to reinforce monetary policy’s effectiveness and prevent a resurgence in inflation.