German inflation rate leaps to 1.7 percent in December 2016

At the end of 2016 the inflation rate in Germany hit its highest point since mid-2013. At 1.7 percent in December, it was almost one percentage point higher than in the prior month (0.8 percent). The rise in the inflation rate was primarily driven by the recent climb in the price of oil, which in December 2016 ran on average at a good USD 54. One year earlier, oil was more than 40 percent cheaper, and was priced at just under USD 38 a barrel. In other words, for the first time in three years energy prices once again had a positive impact on overall inflation.

Are we now facing the threat of a strong bout of inflation in Germany? The answer is: No. The recent rise in inflation does, however, show how strongly energy prices influence the inflation rate. Just as the in part negative inflation rates in spring 2016 did not point to any real danger of deflation, now we need not fear any rampant inflation rate either. In the coming months, the inflation rate in Germany will admittedly continue to climb, and in spring may even pass the two-percent mark. However, in the further course of 2017 the impact of higher energy prices will wane and the inflation rate will then presumably fall again somewhat.

On balance, inflation in Germany will for 2017 as a whole average about one and a half percent, and thus be about one percentage point higher than the year before. This will squeeze consumers’ willingness to buy and dampen private consumer spending, one reason why the economic cycle will not be quite as dynamic this year as it was in 2016.

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