German inflation spikes to 2.8pc in March as energy costs soar

BERLIN: German inflation accelerated in March due to surging energy prices against the backdrop of the Iran war, and economists see further increases ahead.

Inflation, which is EU-harmonised, reached 2.8 percent year-on-year, preliminary data from the federal statistics office showed on Monday. The figure was in line with an analyst forecast that saw inflation jumping to 2.8 percent from 2.0 percent in February.

Energy prices were up 7.2 percent on the same month of the previous year, posting the first increase since December 2023.

Core inflation, which excludes volatile food and energy prices, was unchanged from the previous month at 2.5 percent.

So far, the Iran conflict has seemingly not affected other prices, said Ralph Solveen, senior economist at Commerzbank.

However, the longer the war continues and causes energy and other raw materials to become more expensive or scarce, the more likely it is that underlying inflation will also pick up, as business surveys already suggest, Solveen said.

ONLY THE BEGINNING

“This rise in the inflation rate is only the beginning,” said ZEW economist Friedrich Heinemann.

He noted that even before the Iran war, Germany was already facing persistent inflation in services. Services inflation remained unchanged in March at 3.2 percent for the third consecutive month.

Heinemann said this combination would now quickly drive inflation in Germany to 3 percent and beyond.

Risks to core inflation are tilted to the upside, as second-round effects from the energy price shock feed through to prices, particularly in transport services and underlying transportation costs for goods, said Claus Vistesen, chief euro zone economist at Pantheon Macroeconomics.

The supply shock in fertiliser also threatens higher food inflation, though the lag is longer than for energy, he said.

The Ifo Institute released a survey on Monday showing that German companies expect to raise prices significantly as a result of the war. Its price expectations index rose to 25.3 points in March from 20.3 in February.

“Higher production and transport costs will also push up the prices of goods and services,” said Ifo’s Klaus Wohlrabe.

The German data comes ahead of the release of euro zone inflation on Tuesday. Inflation in the currency bloc is expected to hit 2.7 percent in March, according to economists polled by Reuters.

European Central Bank policymakers are debating whether and under what circumstances they would need to raise interest rates to prevent energy price increases from seeping into the costs of other goods and services.

Financial markets now expect three ECB interest rate hikes in 2026, with the first coming in April or June, on the premise that policymakers will want to move early after being criticised for misjudging an inflation surge in 2021-22 following the COVID pandemic and the economic disruption it caused.