German inflation to stay high, growth slowed, Bundesbank says

High living costs and a weak economy have become increasingly important political issues, fuelling voter dissatisfaction with mainstream parties.

The Bundesbank said inflation, which stood at 2.9% in August, would "remain elevated for the time being," citing high prices for fuel and other refined oil products, low gas inventories and the risk that higher energy costs spread to other parts of the economy.

In addition, healthcare reforms due to take effect at the start of 2027, together with changes to pharmacy supply rules introduced this year, are expected to lift inflation by nearly half a percentage point temporarily in the first half of next year.

On the activity front, the German central bank said the economy would have only grown slightly in the current quarter.

But it continued to expect a recovery in the last three months of the year as business surveys pointed to a brighter outlook for manufacturing, fiscal support helped activity and infrastructure spending continued to underpin construction.

"However, this will also depend on how the conflict in the Middle East develops and how quickly water levels in important waterways normalise," the Bundesbank said.