German Inflation Climbs Back To 7.9% As ECB Readies Next Hike

Germany’s consumer price inflation accelerated more-than-expected in August, after easing in the previous two months, to its highest level in almost half a century as the European Central Bank policymakers prepare to deliver at least a 50 basis points hike in interest rates next week.

The consumer price index rose 7.9 percent year-on-year in August, faster than the 7.5 percent increase in July, preliminary figures from Destatis showed on Tuesday. That was slightly above the 7.8 percent rise economists had expected.

Headline inflation has returned to its record high 7.9 percent, previously attained in May this year. The rate is the strongest since the winter of 1973-74, when mineral oil prices rose sharply as a result of the first oil crisis.

The EU measure of inflation, the harmonized index of consumer prices or HICP, climbed 8.8 percent year-on-year after an 8.5 percent increase in the prior month. That was in line with expectations.

Destatis said significant price increases on the upstream economic levels and the interrupted supply chains as a result of the corona pandemic have had a price-driving effect.

Special effects such as the effects of the 9 euro ticket and the tank discount are included in the results, the statistical office added.

The German government is planning a new energy relief package as the existing one with rebates on fuel and discounts on public transport is set to expire at the end of August.

Carsten Brzeski, an economist at ING, expects German inflation to be around 10 percent by the end of the year.

“However, with faltering demand as consumers will increasingly be unable and unwilling to pay high prices, as well as negative energy base effects, headline inflation should start to come down over the course of 2023 and could even touch 2 percent by the end of 2023; as outrageous as such a call currently looks,” Brzeski said.

Recent rhetoric from the ECB policymakers has been strongly hawkish. Over the past weekend, ECB policymakers Isabel Schnabel and François Villeroy de Galhau suggested that forceful action was needed against runaway inflation.

The US Federal Reserve has been very aggressive in tightening policy in the face of record high inflation, and its peers including the ECB is widely expected to follow suit.

Eurozone inflation is expected to set a new record of 9 percent in August, when the flash data is released on Wednesday.

“The ECB is under enormous pressure to act, and we expect the central bank to hike by another 50bp next week,” Brzeski said.

“Even with a looming recession, it currently looks as if the ECB is willing to hike even further.”

In Germany, energy inflation was almost unchanged in August with the rate of increase easing fractionally, but remaining high at 35.6 percent versus 35.7 percent in July, Destatis data showed.

The rate of energy inflation in the biggest euro area economy has been high since the war in Ukraine began and the subsequent disruption in the supply of Russian gas.

Food price inflation rose to 16.6 percent from 14.8 percent. Costs for services rose 2.2 percent from last year after a 2.0 percent increase in the previous month.

Compared to the previous month, the CPI moved up 0.3 percent in August after a 0.9 percent increase in July.

The HICP climbed 0.4 percent after rising 0.8 percent in the previous month. Both monthly figures were in line with economists’ forecasts.

Destatis is set to release the final results for August inflation on September 13.

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