Bundesbank Sees Temporary German Inflation Surge Toward 4%

Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

German inflation could climb as high as 4% this year, according to the Bundesbank, a rate not seen since the euro was introduced more than two decades ago.

“In the coming months, the rate of inflation is likely to continue on a slow upward trajectory,” the central bank said in its monthly report. A series of one-off effects toward the end of the year is set to intensify price pressures in Europe’s largest economy, so that “as a result, the inflation rate could temporarily rise to 4%.”

Price growth is currently seeing spikes across the globe as the phasing out of pandemic restrictions leads to strengthening demand for goods and services amid widespread material shortages and supply-chain disruptions. In Germany, the reversal of last year’s sales-tax cut and changes to the basket of goods and services are exerting additional upward pressure on inflation.

While Germany and the wider euro area appear to be on the cusp of a broad economic recovery, policy makers at the European Central Bank have been adamant that price increases must be treated with caution, and that it’s still premature to talk about an unwinding of monetary support. Executive Board member Isabel Schnabel told German broadcaster ARD earlier this week that prices in the euro area should fall sharply next year.

“As the inflation outlook in the euro area still remains muted, economic growth still needs to be supported by a strong monetary stimulus,” Governing Council member Olli Rehn said during a seminar on Friday. The ECB sees price growth averaging just 1.4% in 2023 -- far below its goal of just under 2%.

In its report, the Bundesbank said rapid progress in Germany’s vaccination campaign could lead to a considerable loosening of restrictions in the coming months, allowing the economy to “grow strongly in the third quarter and exceed its pre-crisis level as early as the fourth.”

That’s more optimistic than the latest prediction by the International Monetary Fund, which only sees the German economy making up pandemic losses early next year.

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.