Record fuel prices drive German inflation to highest level since 2023

Germany's inflation rate has climbed to its highest level since late 2023, with consumer prices soaring 3.3% year-on-year in September, the Federal Statistical Office said on Wednesday.

The flash estimate suggested inflation advanced by 0.4 percentage points compared to the 2.9% figure recorded in August, primarily due to a renewed surge in the price of petrol and diesel.

"Inflation is becoming entrenched," said Jörg Krämer, chief economist at Commerzbank.

Inflation has spiked across the world due to the war in Iran, with the blockade of the Strait of Hormuz pushing fuel prices to record-breaking levels.

Despite the flow of traffic through the key waterway increasing, attacks on shipping have continued as negotiations between Tehran and Washington drag on. 

In addition, the advance of the Iranian-backed Houthi militia towards the Bab al-Mandab (Gate of Tears) Strait off Yemen has fuelled another rise in prices for brent oil on global markets. 

The developments have led to fresh all-time highs being recorded in petrol and diesel prices in Germany this month, prompting Chancellor Friedrich Merz's government to reintroduce a fuel tax cut until the end of the year.

German residents paid 14.9% more for fuel and household energy in September than a year earlier, according to Wiesbaden-based agency's calculations. 

Food prices rose by just 0.4% compared with the same month last year, while services - including package holidays and restaurant visits - were 2.7% more expensive.

Economists say that the longer energy prices remain high, the greater the risk of hikes across all sectors as transport costs soar. 

Import prices, which feed through to consumer prices with a delay, rose by around 8% in August, the steepest increase since late 2022. 

The effects of a record summer of heat and drought - which has already limited transport on key waterways such as the Rhine and is likely to affect harvests and - are also driving prices higher.

The Munich-based ifo Institute expects companies to pass on higher energy costs to customers to an increasing degree. 

"Fuel and heating oil have already become noticeably more expensive, and energy suppliers are likely to raise electricity and gas prices in winter," said Timo Wollmershäuser, head of economic forecasting.

Month on month, consumer prices increased by 0.6% between August and September.

Friedrich Heinemann from the ZEW economic research institute said he was concerned that elevated inflation rates are becoming "a permanent state of affairs" on an annual basis.

The last time the annual rate remained below the 2% mark in Germany was 2020, he said - before the post-pandemic rise in prices and the surge seen after the Russian invasion of Ukraine.

The European Central Bank expects inflation across the eurozone to remain well above its 2% target this year. The Frankfurt-based bank could raise interest rates for a third time at its next decision in October.