German inflation hits 13-year high as Bundesbank frets about low ECB rates

Base effect from VAT change is partly responsible

  
The European Union and German flags fly at half-mast for the victims of a shooting that left several people dead in Hanau near Frankfurt, in front of the Reichstag building, the seat of the lower house of parliament Bundestag, in Berlin, Germany, February 21, 2020. Image for illustrative purposes.

The European Union and German flags fly at half-mast for the victims of a shooting that left several people dead in Hanau near Frankfurt, in front of the Reichstag building, the seat of the lower house of parliament Bundestag, in Berlin, Germany, February 21, 2020. Image for illustrative purposes.

REUTERS/Fabrizio Bensch

BERLIN- Germany's annual consumer price inflation accelerated by more than expected to hit a 13-year high in July, leading services sector trade union Verdi to immediately demand "strong wage increases".

Consumer prices, harmonised to make them comparable with inflation data from other European Union countries, rose by 3.1% in July compared with 2.1% in June, the Federal Statistics Office said. A Reuters poll had pointed to a reading of 2.9%.

July's reading was the highest since August 2008, when the harmonised inflation rate hit 3.3%, an official at the Statistics Office said.

The rise pushed the inflation rate further above the European Central Bank's 2% target, and fuelled a debate about whether the increase in the cost of living will persist.

"From today's perspective, a sustained increase in inflation is not to be expected," an Economy Ministry spokesperson said, citing base effects from a temporary reduction in VAT rates in the second half of 2020 that affected comparisons.

However, German central bank chief Jens Weidmann has said he is worried about the prospect of the ECB's low-interest-rate environment being extended for too long. Weidmann said his advisers anticipated inflation nearing 5% in Germany later this year.

Weidmann made his comments after the ECB pledged to keep interest rates at record lows for even longer to boost sluggish inflation and warned that the fast-spreading Delta variant of the coronavirus poses a risk to recovery. 

ING economist Carsten Brzeski said supply chain disruptions and higher commodity costs could put more pressure on prices, adding: "Don't rule out that headline inflation north of 4% at the end of the year will affect wage negotiations in 2022."

Services sector trade union Verdi jumped on the acceleration in inflation to call for robust wage rises.

"We need strong wage increases for employees precisely because of rising prices," Verdi deputy chair Andrea Kocsis told Reuters.

Holger Schmieding, economist at Berenberg Bank, said some service sector businesses had taken advantage of the reopening of the economy after COVID-19 lockdowns to raise their prices.

"In the coming months, the inflation rate will remain high and even tend to increase somewhat," he added.

Euro zone inflation figures for July are due on Friday. In June, the rate ran at 1.9%.

The ECB said last week it would not hike borrowing costs until it sees inflation reach its 2% target "well ahead of the end of its projection horizon and durably".

(Writing by Paul Carrel; Editing by Douglas Busvine and Carmel Crimmins) ((paul.carrel@thomsonreuters.com))


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