German inflation accelerated to a 40-year high of 8.8 per cent in the year to August, bolstering calls for the European Central Bank to accelerate the pace of interest rate rises when its policymakers meet next week.
Consumer prices in Europe’s largest economy were mostly driven by the soaring cost of energy and food, lifting inflation by 0.4 percentage points from July despite recent government measures to cushion the blow for households.
The figures supported calls by ECB governing council members for the bank to be more aggressive in its policy response to the surge in inflation, which has hit its highest level since the euro was created 23 years ago and is expected to have accelerated further in August.
Some, such as Austrian central bank boss Robert Holzmann, have publicly called for the ECB to discuss stepping up the pace of rate rises from an initial half percentage point rise in July to a three-quarter point increase at next week’s meeting.
The fallout from Russia’s invasion of Ukraine has sent wholesale gas and electricity prices surging to record levels in Europe in recent weeks and pushed up the cost of fertiliser and other agricultural commodities such as wheat.
In August, German energy prices rose by 35.6 per cent and food prices by 16.6 per cent. Core inflation, excluding food and energy, rose to 3.1 per cent, up from 2.8 per cent in July.
Some ECB rate-setters worry that the inflationary shock caused by the disruption of the Ukraine war has been accentuated by the demand shock following the reopening of European economies as coronavirus restrictions were ended earlier this year.
“The economy has held up well and some of the factors that helped in the second quarter are likely to carry over into the third quarter,” said Klaas Knot, the Dutch central bank governor, speaking at an event in Copenhagen hosted by Danske Bank on Tuesday.
“The broadening and deepening of our inflation problem generates the need to act forcefully,” said Knot, adding that he expected the ECB to start shrinking its balance sheet by the end of this year, with the issue likely to be on the agenda in October or December.
German inflation continued to rise despite government action, including lower duty on fuel and energy bills and a subsidised €9 monthly train ticket. Many of the measures will expire in September, making it likely that inflation will jump even higher.
Joachim Nagel, head of Germany’s central bank, warned recently that inflation in the country was this year likely to rise at double-digit levels for the first time since 1951 and predicted prices would rise by at least 6 per cent next year.
Recent business surveys indicate that supply bottlenecks have been easing for companies for several months, and many are reporting rising inventories of unsold products due to falling orders.
But Carsten Brzeski, head of macro research at ING, said this did not mean inflation would start falling. “Even if pricing power in both industry and services seems to have peaked, we still expect the pass-through from higher costs to last for a few more months,” he said.
The German inflation figures — combined with a jump in Belgian inflation to a 46-year-high of 9.9 per cent in August — reinforced expectations that overall eurozone price growth is likely to hit a record of at least 9 per cent when the data is released on Wednesday.
However, Spain’s statistics agency said inflation there fell slightly to 10.3 per cent in August despite the price of electricity, food, eating out and package holidays rising at a “notable” pace. Spanish core inflation — excluding non-processed food and energy prices — rose 6.4 per cent in the year to August, the fastest rate since January 1993, it said.
