German inflation expected to ease significantly

Inflation is expected to ease significantly in Germany in March on the back of lower energy prices, preliminary data from six economically key states in the country showed on Thursday.

The inflation rate in Brandenburg and Baden-Wuerttemberg fell to 7.8 per cent year-on-year. It slowed to 7.2 per cent in Bavaria, 7.1 per cent in Hesse and 6.9 per cent in North-Rhine Westphalia. In the eastern state of Saxony, inflation declined to 8.3 per cent in March.

In February, inflation rates for the six states had been between 8.3 per cent and 9.2 per cent.

National inflation data will be published at 1200 GMT. Economists polled by Reuters expect the rate of price rises to ease to 7.5 per cent from 9.3 per cent in February in Europe's largest economy. Inflation in Germany and the euro zone is no longer the result of a pure supply-side shock, but a demand-side issue, ING economists Carsten Brzeski and Franziska Biehl said.

"It is not only higher energy and commodity prices which are being passed through to consumers, it is also widening profit margins in some sectors which are contributing to inflationary pressures," the economists wrote in a note.

Workers are increasing their wage demands and gaining bargaining power in an extremely tight labour market. Wage negotiations for Germany's public sector failed to yield agreement this week although employers offered almost 6 per cent pay growth per year for 2023 and 2024.

"The unions are in a strong position, so we still assume that the eventual deal will be more front-loaded," Citi economist Christian Schulz said. "It will directly raise inflation as local authorities will have to hike rubbish administrative fees and health insurers raise contribution rates to pay for the higher costs."