BERLIN (Reuters) – Inflation in Germany, driven by the continued rise in energy and food prices, hit its highest level in nearly half a century in May, an acceleration that argues against in favor of a half-point hike in the main interest rate of the European Central Bank (ECB) in July.
The consumer price index calculated according to European standards HICP rose by 8.7% over one year in May, against +7.8% in April, according to the first estimate of Destatis, the federal statistics office. This figure is significantly higher than expected since the median of the Reuters consensus estimates put it at 8.0%.
We must go back to the winter of 1973-1974, the period of the first oil shock, to find a comparable level of inflation, specifies Destatis.
Prices have risen sharply across Europe over the past year, first due to disruptions in supply chains after the COVID-19 crisis and then due to the war in Ukraine and sanctions against Russia, which which raises fears of a prolonged period of high inflation after a decade of very weak inflation.
The ECB’s reaction to this development was relatively late compared to those of other major central banks, but its leaders are now clearly showing their desire to raise rates to avoid a lasting anchoring of inflation expectations.
The debate therefore now focuses on the magnitude of the rate hikes needed in the months to come.
ECB President Christine Lagarde and the institution’s chief economist, Philip Lane, recently argued for quarter-point hikes in July and then September in the deposit rate, currently set at -0 .5%. But some experts still believe a half-point rise in July is possible.
“The ECB has clearly passed the stage of debating the need and even the timing of the rate hike,” explains Carsten Brzeski, economist at ING. “The only debate seems to be whether to start July with a 25 basis point hike or a 50 basis point hike.”
“If core inflation in the eurozone continues to accelerate in May and June, Lane and Lagarde may regret their new stance,” he adds.
The majority of the members of the Governing Council of the ECB seem for the moment to lean in favor of a rise of a quarter of a point in July, but the leaders of the central banks of Austria, Latvia and the Netherlands still judge that the possibility of a rise of half a point must remain on the table.
The most important risk in the eyes of monetary policy makers is that of the passing on to consumers of price increases suffered by businesses. Such a trend would in fact transform an inflationary surge initially considered temporary into a lasting and generalized phenomenon likely to trigger a price/wage spiral that is difficult to stem.
“Underlying price pressures are unlikely to abate in the near future,” warns Marco Wagner, economist at Commerzbank. “Companies are increasingly passing on to their customers the sustained rise in the cost of energy and intermediate products.”
Energy prices in Germany have risen by 38.3% in one year and those of food products by 11.1%, detailed statistics published on Monday show.
(Report Miranda Murray, Rene Wagner and Balazs Koranyi, French version Marc Angrand, edited by Jean-Michel Bélot and Kate Entringer)
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