German inflation of 6% adds to pressure on ECB

Inflation in Germany has surged to its highest level since 1992, increasing the pressure on the European Central Bank to explain why it thinks it would be premature to tighten its ultra-loose monetary policy.

German inflation rose 6 per cent in November from a year earlier, as measured by the harmonised index of consumer prices. The increase exceeded the expectations of most economists. German inflation was last this high shortly after the country’s reunification three decades ago.

Spiralling prices are a sensitive subject in a country where people’s approach to money is still haunted by the hyperinflation of the 1920s and 1940s that wiped out most people’s savings.

However, the ECB has tried to calm anxiety about rising prices by saying many one-off causes of inflation such as soaring energy prices and supply chain bottlenecks will fade next year.

Isabel Schnabel, an ECB executive board member, said in a televised interview with Germany’s ZDF on Monday that “November will prove to be the peak” for inflation in the country.

She said German inflation had averaged 2 per cent over the past two years, having fallen sharply when the pandemic hit in 2020, before a sharp rise in 2021. “There is no evidence to suggest that inflation is spiralling out of control,” she added.

Eurozone inflation data is due to be released on Tuesday and is expected to hit 4.4 per cent this month, the biggest rise in 13 years and more than double the ECB’s 2 per cent target.

There are several factors indicating German inflation will fade next year. One is that the rebound in prices from last year’s temporary cut in sales tax will drop out of the inflation data by January. Restrictions announced this month to contain a record surge in coronavirus cases could also cool consumer spending and prices.

“There is little doubt that inflation will fall next year: the only debate is how far and how fast,” said Andrew Kenningham, an economist at Capital Economics.

The main drivers of German inflation in November were energy prices, which increased 22 per cent from a year earlier. That helped to push overall goods prices up by 5.2 per cent. Food prices rose 4.5 per cent, services prices increased 2.8 and rents rose 1.4 per cent.

Part of the increase to the harmonised index of consumer prices came from changes to the weighting of items in the basket, which reflected unusual spending patterns during the pandemic.

Germany is not alone in confronting soaring inflation. Spanish consumer prices rose 5.6 per cent this month, according to data released on Monday — also the fastest pace since 1992. Prices in Belgium also rose 5.6 per cent this month.

Prices are rising even faster in the US, where they increased 6.3 per cent in October from a year ago, the biggest jump for three decades.

The Federal Reserve has responded by starting to wind down its bond-buying programme in a move widely seen as a precursor to the US raising interest rates next year. However the ECB has pushed back against investors’ bets that it will raise rates in 2022.

Christine Lagarde, president of the ECB, said last week that it would be “wrong” to tighten monetary policy in response to the current surge in inflation, predicting that price pressures would fade by the time such measures took effect 18 months later.

“We would cause unemployment and high adjustment costs and would nonetheless not have countered the current high level of inflation,” Lagarde told the Frankfurter Allgemeine Zeitung newspaper. “I would find that wrong.”

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