By Maria Martinez
BERLIN (Reuters) -German inflation eased significantly in March on the back of lower energy prices but still came in above forecast, adding to pressure on the European Central Bank to further tighten its monetary policy.
German consumer prices, harmonised to compare with other European Union countries, rose by an annual 7.8% in March, preliminary data from the federal statistics office showed on Thursday. Compared to February, prices increased by 1.1%.
Analysts had expected the harmonised figure to grow by 7.5% compared with March last year and increase by 0.8% from the previous month.
A first reading of March inflation for the wider euro zone, of whose 20 economies Germany's is the biggest, is due on Friday.
"There are still few if any signs of any disinflationary process outside of energy and commodity prices," ING's global head of macro Carsten Brzeski said.
According to non-harmonised standards, German consumer prices rose 7.4% on the year in March and 0.8% from February. That compared with annual inflation rates of 8.7% in both February and January.
"I won't speak of a reversed trend from February to March, but the decline is strong," German Economy Minister Robert Habeck said on Thursday at a Canadian-German energy conference in Berlin.
Food prices continued to rise rapidly, up 22.3% year-on-year.
The decline in the inflation rate was entirely driven by a slowdown in energy prices, which rose only 3.5% compared with March 2022, when the shock of Russia's invasion of Ukraine caused a huge spike in costs for oil and gas.
As well as this base effect, which reflects the high index level of March 2022, measures included in the German government's third energy relief package contributed to the decline in headline inflation, the statistics office said.
"If this trend continues, we will see a normalisation of energy prices in the coming months," Habeck said.
WAGE DEMANDS
Inflation is now dropping rapidly across the euro zone as high energy costs get knocked out of year-earlier figures, but underlying price growth, which filters out volatile food and energy prices, appears to be stubbornly high.
The German statistics office does not publish a figure for core inflation, but according to Commerzbank (ETR:CBKG) estimates, the inflation rate excluding food and energy prices stood at 5.9% in March, well above the ECB's 2% inflation target.
This is raising worries at the euro zone's central bank that sky-high energy costs have seeped into the broader economy via second-round effects, making it difficult to root out because it is fuelling cost increases across the board.
While energy prices have fallen back to their pre-war levels, ECB board member Isabel Schnabel warned on Wednesday that the energy impact may not drop out of inflation completely because firms have boosted margins and workers are increasing their wage demands.
Europe's labour market is so tight that workers have gained bargaining power, and wage growth is now at between 5% and 6%, its highest in decades. Wage negotiations for Germany's public sector failed this week although employers offered almost 6% pay growth per year for 2023 and 2024.
"The significant rise in labour costs should keep the core inflation rate well above the 2% mark and thus prompt the ECB to raise interest rates at least twice more," Commerzbank's senior economist Ralph Solveen said.
ING's Brzeski said he also expects two more ECB rate hikes of 25 basis points apiece, "as long as the current banking crisis remains contained".
The turmoil of the last few weeks has been a clear reminder that hiking interest rates comes at a cost.
"With any further rate hike, the risk that something breaks increases," Brzeski said.