Decrease in Inflation: Energy Costs Lower, Inflation Rate at 2.0 Percent
In a positive development for the German economy, the country's inflation rate has moderated and is expected to remain close to the European Central Bank's (ECB) target of 2% for the rest of 2025. According to the latest data, Germany's year-on-year inflation rate for June 2025 stood at exactly 2.0%, marking the first time since early 2021 that it has matched the ECB's long-term target.
The current outlook for inflation in Germany is driven by several key factors. Energy prices, which had been a major inflation driver, have dropped sharply, easing headline inflation considerably. Prices for crude oil, natural gas, and electricity have all seen significant decreases, with energy prices falling by 5.3% in April 2025 alone[1][2].
However, while energy prices have decreased, other sectors such as services, food, and housing continue to exert upward pressure on inflation. Core inflation, which excludes energy prices, remains elevated at 2.7%, indicating persistent pressures[1][2]. Services inflation, driven by labor market tightness and wage growth, is expected to keep inflation sticky in the near term[2]. Food prices, which have risen due to increased costs, are also contributing to inflation persistence[2].
The ECB has recently cut interest rates to 2.00%, signalling a possible pause in further rate cuts. This move reflects a balance between supporting growth and managing inflation risks[1]. Other factors such as currency effects and demand, as well as the weaker euro and interest rate cuts, are expected to offset downward pressure from subdued private spending and a cooling labor market, easing wage growth[3].
Economists, including the Council of Experts ("Five Wise Men"), expect the 2025 annual average inflation rate to be around 2%. Some projections show inflation between 2.0% and 2.4%, with expectations that it will dip below 2% again in 2026 before returning to target in 2027[1][4][5].
Despite the renewed decline in inflation, economist Jörg Krämer of Commerzbank sees high inflation risks[6]. Upside risks to inflation include faster wage growth and EU tariffs, while fiscal policy developments will also be important to monitor[3].
The vacation season has not brought relief from inflation in terms of service prices, with prices for services such as insurance, package holidays, and car repairs rising by 3.3% in June 2024[7]. Consumers in Germany are feeling the pinch, with items like butter, chocolate, fruit, and vegetables becoming more expensive[8].
The planned billions for defense and infrastructure in Germany could potentially lead to an increase in inflation due to the additional demand created[9]. The aggressive trade policy of US President Donald Trump could also affect prices and potentially boost inflation in the eurozone if a renewed tariff shock occurs[10].
In summary, Germany’s inflation in 2025 is expected to remain close to the ECB's target of 2%, underpinned by low energy costs but moderated by persistent inflation in services and food, combined with cautious monetary policy adjustments reflecting this mixed inflation environment[1][2][3].
In the mixed inflation environment of 2025, other sectors such as services and food continue to finance inflation persistence, with core inflation remaining elevated at 2.7%. The European Central Bank (ECB) is managing inflation risks by other factors like currency effects and demand, as well as the weaker euro and interest rate cuts.
