German inflation eases in December for the first time in six months

© Reuters. FILE PHOTO: A commuter train passes the skyline in a slow shutter speed photograph as the spread of the coronavirus disease (COVID-19) continues and the country faces new restrictions to control the pandemic in Frankfurt, Germany, December 2, 2021. REUTE

By Michael Nienaber and Klaus Lauer

BERLIN (Reuters) -German annual inflation slowed in December for the first time in six months, but remained well above the European Central Bank's price stability target of 2% for the euro zone as a whole, preliminary data showed on Thursday.

The reading from Germany, the biggest euro zone economy, may indicate that inflation across the bloc peaked in November at a record 4.9%. A first estimate of December euro zone inflation is due for release on Friday.

Consumer prices, harmonised to make them comparable with inflation data from other European Union countries (HICP), rose 5.7% year-on-year following a record increase of 6.0% in November, the German Federal Statistics Office said.

The national consumer price index (CPI) rose by 5.3% year-on-year, the highest reading since June 1992 and marking a further acceleration in price pressures after 5.2% in November.

Germany's full-year HICP inflation rate jumped to 3.2% in 2021 from 0.4% a year earlier, while the national CPI inflation rate rose to 3.1% from 0.5% in 2020.

The central bank last month raised its 2022 inflation forecast for Germany to 3.6% from 1.8% seen last June and predicted a rate of 2.2% for both 2023 and 2024 - all rates above the ECB's inflation target.

The Statistics Office said there were a number of factors driving the unusually high inflation rates since July 2021, including base effects due to low prices in 2020 when the economy plunged due to the first coronavirus wave.

"In this context, especially the temporary value-added tax (VAT) reduction and the sharp decline in mineral oil product prices have had an upward effect on the current overall inflation rate," the office said.

"Apart from the usual market developments, additional factors are the introduction of CO2 pricing as of January 2021 and crisis-related effects such as marked price increases at upstream stages in the economic process."

German government officials and policymakers at the central bank expect inflation to ease further in the coming months as transitory effects, such as the temporary VAT cut, should wane from January onwards.

"It is true that inflation should fall after the turn of the year, partly due to special factors," Commerzbank (DE:CBKG) analyst Joerg Kraemer said.

"But the inflation risks are clearly pointing upward - not only for Germany but also for the euro zone. It's time for the ECB to take its foot off the gas."

The ECB expects inflation to peak around the turn of the year. Preliminary inflation data for the euro zone is due on Friday at 1000 GMT, with a Reuters poll of analysts expecting a slowdown to 4.7% in December from November's record 4.9%.

The ECB raised its inflation projections last month. It now sees consumer prices rising 3.2% next year, well above the 1.7% projected in September, but forecasts inflation will slow to 1.8% in 2023 against an earlier projection of 1.5%.

Central banks including the U.S. Federal Reserve have acknowledged that inflation may prove more persistent than once thought, but the ECB has stuck with its narrative that price growth will slip back below the target on its own in late 2022.