Carsten Brzeski, the Global Head of Macro for ING Research, notes that headline inflation continues its downward trend in Germany, leading to the longest deflationary streak since 2009.

"Based on the inflation outcomes in several regional states, German inflation came in at -0.3% year-on-year in November, from -0.2% in October. The harmonised index, relevant for European Central Bank policymaking, dropped to -0.7% YoY, from -0.5% in October. Headline inflation has now been in negative territory since August. The last time German headline inflation was negative in four consecutive months was in 2009."

"The negative base effect from low energy prices and above all, the VAT cut in July are the reasons for this negative inflation streak. The VAT reduction is most visible in prices for clothing, other consumer goods and increasingly for other leisure activities and packaged holidays. At the same time, the fact that the increase in hotel and restaurant prices is still very much in line with the trend seen prior to the VAT cut suggests that lower taxes are also used to support businesses and are not necessarily entirely passed on to consumers."

"Looking ahead, after another negative reading in December, the path of headline inflation will depend on whether or not the German government sticks to its plan of reversing the VAT reduction in January."