German inflation hits highest level in almost 3 years

German inflation accelerated to ‌its ​highest level since December 2023 and seasonally adjusted unemployment rose back above 3 million in September, illustrating the challenges still facing Europe's largest economy after a stronger-than-expected first half of the year. Harmonised inflation in Germany rose to 3.3% year-on-year, preliminary data from the ‌federal statistics office showed on Wednesday, showing the impact of the energy price shock of the Iran war.

Analysts polled by Reuters had forecast the EU-harmonised consumer price index at 3.2% in September, compared with 2.9% the month before. Energy inflation rose to 14.9% in September from 10.5% in August, and in line with the trend in other big euro zone economies.

"Inflation currently ‌remains an energy price phenomenon," said Carsten Brzeski, global head of macro at ING. "As long as core inflation remains subdued, some European Central Bank members might question the need ‌for further hikes." Core inflation, which excludes the volatile prices of energy and food, remained unchanged for the third consecutive month at 2.4%.

Cost-of-living concerns have been a factor in a series of defeats this month for German Chancellor Friedrich Merz's party in state elections, with far-right and far-left parties proving successful. To help citizens deal with fuel prices sent soaring by the Iran war, Merz's federal government will cut taxes on gasoline and diesel ⁠by €0.17 ($0.20) per ​litre from Thursday until the end of December.

Headline ⁠inflation is set to fall when the new fuel duty cut takes effect, before rebounding again as the tax cut expires, said Claus Vistesen, chief euro zone economist at Pantheon Macroeconomics. LABOUR MARKET SLUGGISH

In seasonally adjusted terms, ⁠the jobless figure grew by 12,000 to 3.01 million, labour office figures showed on Wednesday, taking it back above the politically sensitive 3 million mark for the first time since April. Analysts polled ​by Reuters had predicted an increase of 1,000. The seasonally adjusted jobless rate remained stable at 6.4%.

The overall unadjusted number of unemployed people dipped slightly under the 3 ⁠million mark in September after sitting above that figure for two months in a row. The autumn pickup in Germany's labour market typically begins in September, but this year's start has been sluggish, labour office head Andrea ⁠Nahles ​said in a statement.

"The economic improvement is not yet reaching the labour market," Nahles added. Gross domestic product in Europe's largest economy grew more than expected in the first half of the year, leading economic institutes to revise up their forecasts, but the economy lost steam in the third quarter.

Looking ahead in the labour market, a cyclical stabilisation should ⁠be in the making, said Carsten Brzeski, global head of macro at ING. "However, the structural trends are likely to continue," he added, pointing to cost-cutting measures across the ⁠automotive industry and the high level of bankruptcies.

Economists ⁠warn that the recovery of Europe's biggest economy in the first half of the year is not yet self-sustaining as high energy prices and economic policy uncertainty are weighing on household consumption. German retail sales rose less than expected in August, increasing by 1.3% ‌compared with the previous month, ‌data showed on Wednesday.