Rising energy and food prices have pushed the German inflation rate to the highest level in more than 3 years, Germany’s federal statistics agency Destatis said in a preliminary estimate Tuesday.
Consumer prices in Europe's largest economy were on average 1.7 percent higher in December compared with the same month a year ago, the statistics agency said in a statement.
Analysts had expected prices to rise 1.5 percent, compared with an annual increase of 0.8 percent in November. Energy, such as electricity and car fuels, and food both rose 2.5 percent in December.
The price increase sparked an immediate reaction from conservative political circles in Germany, which have long been pushing for the European Central Bank to reverse its easy monetary policy for the 19-nation euro zone.
"The zero interest rate policy, with rising inflation, is awful for the German saver," Bavaria's Finance Minister Markus Söder told Handelsblatt. "The ECB should start raising interest rates step by step as quickly as possible."
The ECB is charged with steering monetary policy for the entire 19-nation bloc and has a mandate to keep inflation close to but below 2 percent. Inflation figures for the euro zone are due on Wednesday and are likely to show an annual increase of as much as 1 percent in December.
Investors pushed up yields of euro-zone government bonds after the December inflation rate also jumped in Spain to 1.4 percent and rose slightly in France to 0.8 percent, figures released Tuesday morning showed. The German 10-year government bond climbed to 0.26 percent on the figures, while the French 10-year yield rose 0.1 percentage points 0.77 percent.
Higher bond yields and, conversely, lower bond prices can be seen as a sign of higher inflation expectations among investors, which in turn might prompt some to predict the ECB will push up interest rates sooner than expected.
The Frankfurt-based central bank has kept interest rates at record lows – some rates even at negative levels – and pumped €1.5 trillion, or $1.6 trillion, of liquidity into euro-zone economies since March 2015 to stave off a scenario of falling prices, or deflation, and help boost economic growth. Last month, the ECB said it would continue a bond-buying program through the end of this year.
Germany, a country of savers, has opposed the ECB's loose monetary policies, fearing it could impede economic reforms in indebted countries such as Greece, Italy and Spain, and prolong profligate spending behavior that contributed to the euro zone's debt crisis in the years 2011 and 2012.
Carsten Linnemann, a member of Chancellor Angela Merkel’s Christian Democratic party, also urged the ECB to act or risk losing credibility.
“Until now it has defended its zero interest rates policy with deflation risks. If inflation is now rising again, the ECB should, consequently, raise rates,” Mr. Linnemann told Handelsblatt. “Otherwise the presumption will be confirmed that the zero interest rates policy is politically motivated and that the central bank wants to aid southern European countries.”
Whether the ECB will listen to the criticism from Germany is another matter. Swedish bank Nordea said it did not expect a quick change of ECB policies, in part because the rise in inflation was largely energy driven. The effect of volatile energy prices will likely fade out from the inflation rate after a while.
"The key question will be by how much higher energy prices will feed into other prices (core inflation). We expect a very gradual increase in core inflation both for Germany and the euro area," Nordea economist Holger Sandte said in a note. "We don’t think policymakers will turn hawkish any time soon."
Energy prices in Germany rose 2.5 percent year-on-year in December after falling 2.7 percent in November. Food prices also rose 2.5 percent, after climbing just 1.2 percent the previous month.
Germany's Commerzbank also doesn't see inflation rising much more sharply over the course of this year, which could put a damper on Germany's hopes of a quick interest rate increase.
The bank in a research note said it doesn't expect consumer prices in the euro zone to rise much more than 1.25 percent over the course of this year. Core inflation, which excludes food and energy prices, could even stay below 1 percent. That, coupled with still-high unemployment and low growth, suggests "the ECB’s policy should thus remain far from the target in the foreseeable future," said Commerzbank's Marco Wagner.
Gilbert Kreijger is an editor with Handelsblatt Global, covering companies and markets. Jan Hildebrand leads Handelsblatt's financial policy coverage from Berlin and is deputy managing editor of Handelsblatt's Berlin office. To contact the authors: [email protected] and [email protected]