Recent statistics released by Germany’s Federal Statistical Office, Destatis, indicate that inflation in the country has decreased to 2.3% in March, falling below analysts’ expectations.
This figure is down from February’s rate of 2.6%, which was adjusted after the preliminary report, and contrasts with a Reuters poll that had predicted inflation would settle at 2.4%. The reported rate is standardised for uniformity across the eurozone.
On a month-to-month basis, harmonized inflation registered a rise of 0.4%. Core inflation, which excludes food and energy prices, was recorded at 2.5%, a decrease from February’s rate of 2.7%.
Moreover, services inflation, previously resistant to decline, moderated to 3.4% in March compared to 3.8% in February.
Significant developments for the economy
This data arrives at a pivotal moment for the German economy, amid impending tariffs from U.S. President Donald Trump and potential shifts in domestic fiscal and economic policies.
Germany’s economy heavily relies on trade, rendering it more susceptible to the fluctuations and uncertainties currently influencing global trade policies. Upcoming tariffs from the U.S. include a formidable 25% on imported vehicles, a crucial segment of Germany’s economic structure. Political leaders and automotive industry representatives have vocally opposed Trump’s proposed measures.
However, the effect of the escalating trade tensions on inflation remains uncertain, according to Carsten Brzeski, the global head of macro at ING, who shared insights on Monday.
“The escalating trade conflict and potential European responses to U.S. tariffs could elevate short-term inflationary pressures,” he said.
Brezeski also cautioned that in the long run, any trade war may serve as a deflationary factor for Germany and the eurozone if economic growth falters, forcing companies to liquidate their excess inventory at lower prices.
In addition, the political landscape in Germany is shifting as various parties vie to form a new coalition government following the February 2025 federal elections. Negotiations are ongoing between the Christian Democratic Union, its sister party the Christian Social Union, and the Social Democratic Union.
Despite lingering disagreements, the discussions have produced some outcomes, including recent legislative support for a substantial fiscal package that adjusts existing debt rules to accommodate increased defense spending and a new 500-billion-euro ($541 billion) infrastructure fund.
Awaiting ECB’s rate decision
Germany’s latest inflation figures, combined with new data from other significant eurozone nations like Spain and France, suggest a decline in eurozone headline inflation for March, according to Franziska Palmas, a senior Europe economist at Capital Economics.
French harmonized inflation remained constant at 0.9% year-on-year in March, which fell short of expectations, while Spain’s inflation dropped sharply to 2.2%, a decline from the prior month’s 2.9% and also below forecasts.
Eurozone inflation metrics are set to be released on Tuesday, with economists surveyed by Reuters anticipating a figure of 2.3%.
“Germany’s data, alongside findings from France, Italy, and Spain, imply that eurozone headline inflation could arrive at 2.2% for March, slightly below what was anticipated,” Palmas noted on Monday. She added that core inflation is likely to remain stable or dip slightly compared to February.
“Services inflation appears to have also declined, a development that is likely to be welcomed by ECB officials,” she remarked, adding that “the significant drop in Germany should compensate for the minor increases observed in France and Italy.”
“This scenario heightens the odds that the ECB will opt for another rate cut in April, in line with our projections, rather than pausing,” Palmas concluded.
Market predictions currently reflect a 91% probability of a 25-basis-point interest rate reduction by the ECB on April 17, according to LSEG data.
