German inflation hits highest level since 2008

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German economy updates

German inflation has surged to its highest level for over a decade, boosted by substantial price rises for clothing, food and recreation, in a move which is likely to intensify the debate about the eurozone’s ultra-loose monetary policy.

The harmonised index of consumer prices in Germany was 3.1 per cent higher in July than a year ago, the Federal Statistical Office announced on Thursday. The last time it reached that level was in the build-up to the 2008 financial crisis.

German inflation is rising faster than most other European countries due in part to one-off effects, such as its reversal of last year’s temporary cut in value added tax, a new carbon tax and a reweighting of the basket of products used to calculate price changes.

But prices of manufactured goods are also being driven higher as many German factories grapple with spiralling costs and shortages of materials, such as semiconductors, metals, plastics and wood, as well as bottlenecks on container shipping routes.

As a result “producer prices are set to increase further, possibly putting more pressure on consumer prices”, said Carsten Brzeski, head of macro research at ING.

Inflation is rising in many countries as the world economy rebounds from the impact of the pandemic, increasing pressure on central banks to start winding back the monetary stimulus they launched last year in response to the crisis. 

Jens Weidmann, president of the German central bank, warned last week that inflation in Europe’s largest economy will “go in the direction of the 5 per cent mark towards the end of the year” — higher than at any time since the euro was launched more than two decades ago.

Companies’ selling price expectations rose for the fifth consecutive month in July, according to the European Commission, which on Thursday said its indicator of eurozone business and consumer confidence rose 1.1 points to 119, a record since the survey began in 1985.

While there are few signs that German wages are spiralling upwards, the country’s unemployment numbers have started to fall. The number of people in employment in Germany rose by 78,000 in June, according to figures published on Thursday. It was the biggest increase since the pandemic hit, although there are still 573,000 fewer people in work than there were in February 2020 — the month when Covid-19 first hit Europe.

Earlier on Thursday, Spain’s statistical agency said its inflation rate was 2.9 per cent in July, its highest level since 2017 and up from 2.7 per cent in June, boosted by higher prices for accommodation and gas.

Figures for price growth in the eurozone will be published on Friday. Economists polled by Reuters expect inflation in the bloc to rise from 1.9 per cent in June to 2 per cent in July. That would be in line with the new inflation target set by the European Central Bank, but its policymakers have said they expect inflation to fall again next year.

Markus Gütschow, an economist at Morgan Stanley, said: “We remain more sceptical about the longer-term inflation strength, once base effects from oil and policy actions abate and the economy has adjusted to a new post-pandemic normal, and anticipate a sharp fall next year, to under 2 per cent again.”

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