Germany: Inflation rises to over 13-year high in August
Harmonized consumer prices rose 0.09% month-on-month in August, down from July’s 0.55% increase. The print came on the back of falling prices for food and non-alcoholic beverages; clothing and footwear; recreation and culture; and education. This offset a marked uptick in transport prices amid rising fuels and lubricants costs.
Harmonized inflation rose to 3.4% in August from 3.1% in July. August’s print marked an over 13-year high. However, the result has been influenced by a low base effect due to the temporary removal of VAT rates from July last year until December 2020 as part of the federal government’s fiscal response to the pandemic. In addition, the introduction of a CO2 tax since January this year added further fuel to price pressures, while the economic reopening provided further pressure. Meanwhile, the trend pointed up, with annual average harmonized inflation coming in at 1.3% in August (July: 1.1%).
FocusEconomics Consensus Forecast panelists expect harmonized inflation to continue rising further in the remaining months of the year amid a low base effect . Analysts at the EIU added:
“Inflation spiked in the first half of 2021 and will remain elevated in the remainder of the year, owing to one-off factors, before moderating in 2022-25. Higher global energy prices, new carbon emissions certificates that have increased transport and heating costs, and a minimum-wage rise have boosted inflation […]. Annual price growth will average 2.5% in 2021 given these changes in administered prices, and register about 3.0% in the second half of the year (when the base period will include the 2020 value-added tax—VAT—cut, which has since been suspended). We expect inflation to moderate to an average of 1.6% in 2022-25, dampening opposition to the accommodative monetary policy of the European Central Bank.
Carsten Brzeski, global head of macro at ING, commented:
“[The] inflation surge will do very little to bridge the gap between the two inflation camps: One arguing that inflation drivers are transitory and that base effects will disappear or even reverse next year and the other seeing a broad risk of accelerating inflation. We remain somewhere in the middle. While structural factors like labor market slack or digitalization indeed argue in favor of a more benign approach to inflation, we are seeing the most fertile breeding ground for second-round effects in a long while. In fact, the narrative that German wage settlements were well-behaved this year belongs to history. Latest announcements show that unions are going into the upcoming negotiations with demands linked to current inflation numbers, not to inflation expectations.”