Be Ready for German Inflation Spike Near 6%, Bundesbank Says

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German inflation may spike even higher than previously forecast this month with a rate just under 6%, according to the Bundesbank.

About 1 1/2 percentage points of that will reflect a temporary cut in value-added tax and very low prices for travel-related services in 2020, the Frankfurt-based central bank said in its monthly report released on Monday.

German inflation already hit a three-decade high of 4.6% in October, but that was always flagged as a prelude to an even faster surge in November. The latest data are due next Monday, a day before the highly anticipated consumer-price report for the euro area. 

An increase of the magnitude seen by the Bundesbank is likely to intensify focus on the European Central Bank in Germany, where inflation is a sensitive topic. The current surge -- partly linked to spiking energy prices -- has stoked public attention, with both the Council of Economic Advisers and national tabloid Bild warning on ultra-loose monetary policy.

The Bundesbank predicts inflation will retreat in coming months. The travel-related element will “lapse in December and the VAT base effect in January.” 

That’s no all-clear however. German inflation “could remain well above 3% for a longer period of time,” according to the report. “For the core rate, values well over 2% are conceivable.” 

The Bundesbank also highlighted that a surge in market prices for natural gas will “probably only be passed on to consumers after the turn of the year.”

Germany’s benchmark 10-year yield stayed two basis points higher at minus 0.32% after the report, while the euro fell 0.1% against the dollar to $1.1282.

Wage Pressure

The warning on inflation is more emphatic than the central bank’s previous mentions of a 5% peak. It coincides with the final days of coalition talks that are likely to see a new government under the leadership of Social Democrat Olaf Scholz.

Those negotiations are considering raising the minimum wage to 12 euros ($13.5) toward the end of 2022. The Bundesbank warned that such an increase would “noticeably intervene in the lower pay ranges and would have non-negligible effects on higher wage groups,” increasing overall pressures.

That’s relevant for the ECB. One reason officials have been able to classify the current inflation spike as “temporary” is that secondary effects have failed to materialize so far. A pickup in wages would be hard to ignore however.

Bundesbank President Jens Weidmann already sounded the alarm on Friday, saying it’s possible euro-area inflation will remain above the 2% target in the medium term and not slow as quickly as many of his ECB colleagues currently predict. Weidmann is stepping down as head of the traditionally hawkish Bundesbank at year-end. His successor will be decided by Scholz’s government.

Other highlights from the Bundesbank report:

• Economic growth may be stalling this quarter
• The service sector recovery is likely to slow
• In industry, supply bottlenecks are likely to continue to weigh on production

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