Capital Economics forecasts modest rise in Germany's inflation following fiscal stimulus

Capital Economics forecasts that Germany's upcoming fiscal stimulus will have a minor impact on inflation. Despite the country's budget deficit rising from 2.8% of GDP in 2024 to around 4% in 2026–2027, price growth is unlikely to exceed the European Central Bank's (ECB) 2% target significantly.

German authorities plan to prioritize increased defense spending. This sector does not have a direct impact on inflation, Capital Economics experts report. However, analysts acknowledge a potential rise in industrial metals prices, largely driven by global market trends.

That said, any increased demand for ores and alloys from Germany’s defense industry could be offset by reduced consumption in the struggling automotive sector, Capital Economics notes.

Experts believe that household incomes are also unlikely to change significantly. Wage growth in the country, as well as the rise in consumer prices, will be quite moderate. As inflationary pressures ease in Germany, demands from labor unions are also softening. This is evidenced by the Bundesbank data.