German inflation falls to 2.3% in March, backing bets for ECB rate cut

German inflation came in at a lower-than-expected 2.3% in March, preliminary data from the country’s statistics office Destatis showed Monday.

It compares to February’s 2.6% print, which was revised lower from a preliminary reading, and a poll of Reuters economists who had been expecting inflation to come in at 2.4% The print is harmonized across the euro area for comparability. 

On a monthly basis, harmonized inflation rose 0.4%. Core inflation, which excludes food and energy costs, came in at 2.5%, below February’s 2.7% reading.

Meanwhile services inflation, which had long been sticky, also eased to 3.4% in March, from 3.8% in the previous month.

The data comes at a critical time for the German economy as U.S. President Donald Trump’s tariffs loom and fiscal and economic policy shifts at home could be imminent.

Trade is a key pillar for the German economy, making it more vulnerable to the uncertainty and quickly changing developments currently dominating global trade policy. A slew of levies from the U.S. are set to come into force this week, including 25% tariffs on imported cars — a sector that is key to Germany’s economy. The country’s political leaders and car industry heavyweights have slammed Trump’s plans.

How the trade conflict will impact inflation is however still unclear, Carsten Brzeski, global head of macro at ING noted Monday.

“The looming escalation of trade tensions and possible European retaliation to US tariffs could add to inflationary pressures in the short run,” he said.

“In the longer run, however, any trade war could also turn into a disinflationary force for Germany and the eurozone if growth were to weaken and companies potentially have to sell their increased inventories,” Brezeski said, noting that goods originally produced for the U.S. market could ultimately be sold in Europe at a reduced price point.

Meanwhile Germany’s political parties are working to establish a new coalition government following the results of the February 2025 federal election. Negotiations are underway between the Christian Democratic Union, alongside its sister party the Christian Social Union, and the Social Democratic Union.

While various points of contention appear to remain between the parties, their talks have already yielded some results. Earlier this month, Germany’s lawmakers voted in favor of a major fiscal package, which included amendments to long-standing debt rules to allow for higher defense spending and a 500-billion-euro ($541 billion) infrastructure fund.

Monday’s inflation figures out of Germany, paired with recent data from other major euro zone countries such as Spain and France, suggests that euro zone headline inflation will likely have eased in March, Franziska Palmas, senior Europe economist at Capital Economics, suggested in a note.

French harmonized inflation was unchanged at 0.9% on an annual basis in March, lower than expected. In Spain, the reading fell sharply to 2.2%, down from 2.9% in the previous month and also lower than expected.

Euro zone inflation figures are due on Tuesday. Economists polled by Reuters were last forecasting the reading to come in at 2.3%.

“Germany’s figures, together with those from France, Italy and Spain, suggest that euro-zone headline inflation will probably come in at 2.2% in March, a bit below expectations,” Palmas said Monday. Core inflation is expected to be unchanged, or slightly lower than in February, she added.

“Services inflation probably also fell, which will please ECB officials,” she said, adding that “the chunky fall in Germany should more than offset the 0.1%-pt rises in France and Italy.”

“This increases the likelihood that the ECB cuts rates again in April, in line with our forecast, rather than pausing,” Palmas said.

Markets were last pricing in an around 91% chance of a 25-basis-point interest rate cut from the ECB on April 17, LSEG data showed.