German inflation unexpectedly dips to 2% in February

By Rene Wagner and Matthias Williams

BERLIN, Feb 27 (Reuters) - German inflation unexpectedly eased to 2% in February, pushed down by falling energy costs, provisional data showed on Friday, following a softening of price growth across the euro zone and expectations that interest rates will remain unchanged.

Analysts polled by Reuters had forecast inflation, which is European Union-harmonised, to remain unchanged from the 2.1% reported for January. Core inflation, excluding food and energy, stayed at 2.5 percent.

"Inflation in Germany remains in the green," said Ulrich Kater, chief economist at DekaBank. "Price increases have been dampened in recent months by lower energy prices and a strong euro against the U.S. dollar."

Other sets of economic indicators released on Friday offered a mixed picture for Germany, with unemployment remaining above the 3 million mark as years of stagnation in Europe's largest economy took a toll.

The European Central Bank (ECB) has targeted a 2% inflation rate in the medium term and its President Christine Lagarde said on Monday said inflation and interest rate policy remained in a "good place".

Euro zone inflation fell to a 16-month low of 1.7% in January, prompting some policymakers to warn price growth could slow too much and that the ECB must be ready to act.

"The ECB will maintain its current course for the time being," said Thomas Gitzel, chief economist at VP Bank.

LABOUR MARKET STRUGGLES WITH MOMENTUM

The number of unemployed people in Germany fell slightly, according to labour office figures. But in remaining above 3 million it underscores the challenge facing Chancellor Friedrich Merz's government, which has vowed to boost growth after two years of contraction and will fight several state elections this year, starting next month.

Merz has pledged to pull Germany out of its downturn by sharply boosting infrastructure and defence spending, but the impact of those measures is taking longer than expected to materialise on the ground.

"...With the economy effectively stagnating for more than five years and industry facing severe structural challenges, a deterioration in the labour market was inevitable," said a note from ING THINK economic and financial analysis.

"All in all, today's labour market report sends a mixed message but definitely no signs of a turning point. Instead, the gradual worsening looks set to continue."

Real wages continued to recover, up 1.9% in 2025 and 2.9% in 2024, but still below the level seen in 2019 as the inflation shocks after the start of the pandemic and Russia's 2022 invasion of Ukraine ate into spending power.