A year ago, inflation was still at double-digit levels. And while a fall in inflation is not the same as a real fall in prices, the disinflationary process is notable. In November, as in previous months, the main drivers of falling inflation rates were favorable base effects in almost all sectors of the economy, as well as falling energy prices and price cuts in leisure, entertainment and hospitality services. The only worrying fact was the monthly increase in food prices.
Looking ahead, the disinflationary process should continue. In fact, this year’s decline in headline inflation has been primarily due to base effects. The next stage of disinflation will be driven by the ECB’s tightening of monetary policy. Weakening demand as a result of rising interest rates should lead to real price declines in the coming months. This is already reflected in sales price expectations, which have begun to decline significantly in the services sector, following the previous trend in the manufacturing sector. As a result, German headline inflation should fall further in December and stabilize in the 2% to 3% range in 2024.
It is true that the risks to this inflation forecast are obvious; It is not only energy prices but also recent fiscal problems in Germany that could push inflation up again. In particular, fiscal problems could generate upward pressure on prices. A reversal of the reduced VAT rate for restaurants, from 7% to 19%, has already been announced, raising headline inflation by about 0.1 percentage points. Further tax increases or administered price increases could follow to close the government’s funding gap. Furthermore, we never tire of repeating our long-held view that, structurally, inflation will be higher in the coming years than before the pandemic. Demographics, risk reduction and decarbonization are arguments in favor of upward pressure on price levels.