Inflation in Germany has risen at the fastest rate for many years, in a sharp reversal of the past five months in negative territory that threatens to pose a communication challenge for the European Central Bank.
German headline consumer price inflation rose from minus 0.7 per cent in December to 1.6 per cent in January, according to a provisional estimate from the Federal Statistical Office published on Thursday. Economists polled by Reuters had on average only expected a rise to 0.5 per cent.
The jump was fuelled by a combination of one-off factors rather than a revival in demand, as many of the country’s shops, schools and leisure companies remain closed under the coronavirus lockdown. The reversal of a temporary reduction in German value added tax at the start of this year played a role, as did higher energy prices due to the country’s new carbon tax and an increase in the minimum wage.
Analysts said clothing and footwear prices were expected to be higher in January compared with a year ago due to the lack of seasonal sales while stores are closed. The annual revision in the weightings of products used to calculate inflation was also likely to have pushed up average prices, as more weight was given to products that have become more expensive, such as food, and less to products that have become cheaper, such as packaged holidays.
While inflation is expected to remain lower in other European countries, the rapid rise in German prices will push up the pan-eurozone headline measure of inflation, which has also been in negative territory since last summer.
The ECB forecasts that price growth will rise from minus 0.3 per cent in the fourth quarter of 2020 to 1.5 per cent in the fourth quarter of this year, before falling back to 1.2 per cent a year later — still well below its target of below but close to 2 per cent.
But Carsten Brzeski, global head of macro research at ING, said 2021 could be the first year that the ECB underestimates the increase in inflation, having consistently missed its target for most of the past decade.
“I have pencilled in German inflation going clearly above 2 per cent later this year and maybe the eurozone will also get above 2 per cent this year,” said Mr Brzeski.
Analysts said this could pose a communication problem for the central bank, which would need to explain why its huge stimulus package was still needed to support the economy. Conservative commentators in Germany have long feared excessive inflation and worry that loose monetary policy could cause the economy to overheat.
“The ECB's communication challenge ahead: avoid any overreaction to January inflation data,” said Frederik Ducrozet, strategist at Pictet Wealth Management.
The ECB has already started preparing the ground for such a scenario. Christine Lagarde, ECB president, said this month that “any kind of tightening at the moment would be very unwarranted” even if pent-up demand led to a surge in prices.
Isabel Schnabel, an ECB executive board member, said a few days later that while “prices for services, such as travel or eating out, may soar on the back of the pent-up demand . . . such a short-term development should not be mistaken for a sustained increase in inflation, which is likely to only emerge very slowly”.
Mr Ducrozet said the ECB should not find it difficult to defend its stimulus policy. “Inflation remains far away from target; core inflation looks set to resume declining; the ECB is pre-committed to keeping loose financing conditions,” he added.