Germany’s inflationary pressures resurged strongly in December, exceeding forecasts and reaching an 11-month high, with latest data signalling a persistent challenge for policymakers at the European Central Bank.
Germany’s inflation figure hit 2.6% in December, its highest level in 11 months and surpassing forecasts of 2.4%. Core inflation edged up to 3.1%. Markets reacted as Bund yields hit 2.45% and the euro gained 1.3%. Equity indices rallied on easing US tariff concerns.
Preliminary prints from the Federal Statistical Office, released on Monday, showed Germany’s consumer price index rising by 2.6% year-on-year in December, a sharp increase from 2.2% in November and surpassing economists’ forecasts of 2.4%.
This marks the highest annual inflation rate since January 2024.
On a monthly basis, prices climbed 0.4%, reversing November’s 0.2% decline and beating predictions for a 0.3% rise.
When food and energy are excluded, core inflation inched higher to 3.1% from 3% in November, highlighting persistent underlying price pressures.
Looking at the harmonised index of consumer prices, used for cross-country comparisons in the eurozone, inflation surged to 2.9% year-on-year, again marking an 11-month high and well above the 2.6% forecast.
Month-on-month, the HICP advanced by 0.7%, its strongest gain since March 2023, outpacing the 0.5% consensus estimate.
Breaking down the data, prices accelerated in several key categories. Service costs rose 4.1% year-on-year in December, compared with 4% in November, while food prices climbed to 2%, up from 1.8%.
Energy prices, which had been a key driver of disinflation in recent months, fell at a slower pace of -1.7%, compared with -3.7% in November.
Germany’s inflation figures precede Tuesday’s release of eurozone-wide data, which is expected to show a rise in annual inflation to 2.4% in December from 2.2% in November.
Core inflation across the bloc is projected to remain stable at 2.7%, underscoring the ECB’s challenge in meeting its 2% target.
Market reactions
The inflation surprise sent ripples through financial markets, particularly in bond and currency trading.
German government bond yields climbed, with the benchmark 10-year Bund yield rising to 2.45%, the highest since early November, and the two-year Schatz yield advancing by 3 basis points to 2.20%.
Investors interpreted the inflation data as reducing the likelihood of aggressive ECB rate cuts in the near term.
In foreign exchange markets, the euro strengthened by 1.3%, trading above $1.04.
The single currency gained momentum following a Washington Post report suggesting that the Trump administration is considering a softened version of its universal tariff plan.
According to unnamed sources cited by the Post, the administration’s economic team is deliberating tariffs targeting specific sectors, driven by economic conditions and national security concerns, while avoiding blanket increases on all US imports.
European equity markets also reacted positively, with major indices posting solid gains on Monday. The Euro Stoxx 50 index surged by 1.6%.
In France, the CAC 40 rose 1.5%, driven by luxury and industrial stocks. Shares of Hermès, LVMH, and Kering climbed approximately 3.7%, buoyed by expectations of fewer trade disruptions.
Italy’s FTSE MIB gained 1.2%, led by a 5% jump in Stellantis, as car makers rallied amid hopes for more measured US tariff policies.
Germany’s DAX index added 0.9%, with automotive stocks leading the way.
Shares of Porsche AG and Daimler Truck Holding AG soared over 6%, while BMW, Mercedes-Benz AG, and Volkswagen rose 5.6%, 4.4%, and 4%, respectively.
