German and Spanish inflation remain high to increase pressure on the ECB

Inflation in Germany and Spain remained higher than expected in January, increasing pressure on the European Central Bank to explain whether it still believes euro area inflation will fall below target later this year.

Sharp rises in energy and food prices led to annual German inflation of 5.1 percent in January, down from 5.7 percent in December, according to the country’s harmonized index of consumer prices published on Monday.

“A number of service providers – restaurants, hotels, hairdressers, craftsmen, etc. – have raised their prices since the summer of 2021 to compensate for lost revenue,” said Marco Wagner, senior economist at Commerzbank. “This category also includes package holidays.”

This meant that German inflation did not fall as much as expected by economists polled by Reuters, which had predicted a larger fall to 4.7 percent. Compared with the previous month, inflation rose by 0.9 per cent, indicating that the underlying price pressure remains strong.

Annual inflation in Spain also remained higher than expected at 6.1%. in January, a decrease from 6.5 per cent. In December.

Line chart showing that German inflation has risen higher than expected

The ECB has a target of 2%. inflation for the euro area, and last month inflation was expected to fall below this level in the fourth quarter of this year, justifying its decision to maintain a supportive monetary policy.

Economists expect eurozone inflation to fall from a record high of 5 percent in December to 4.4 percent in January, when these figures are released on Wednesday. Some analysts have raised their forecasts to reflect the pressure on energy prices due to tensions between Russia and Ukraine and further disruption of supply chains caused by the pandemic.

“In the short term, the risks to the inflation outlook have clearly tilted upwards,” said Katharina Utermöhl, senior economist at Allianz. “Along with growing geopolitical tensions, which are putting further upward pressure on energy prices, China’s zero-Covid policy could demand more serious lockdowns, which in turn could boost inflation by further postponing any easing of global supply chain stress.”

Renewed inflation is likely to dominate the ECB’s next board meeting on Thursday, although most economists expect it to stick to its timetable to reduce asset purchases to a lower level this year, while keeping interest rates at a negative level.

“For the ECB, today’s German overall inflation data will most likely lead to a further upward revision of its inflation projections,” said Carsten Brzeski, head of macro-analysis at ING. “Nevertheless, we see that the ECB is not in a position to consider raising interest rates at some point.”

Rising prices are a sensitive issue for Germans, whose access to money is still haunted by hyperinflation in the 1920s, which wiped out most people’s savings.

German energy prices were amplified by the effect of higher gas prices on annual consumption bills and the increase in a carbon tax by 5 to 30 euros per year. tonnes at the beginning of this year, which more than offset a reduction in the green energy tax on electricity. Core inflation in Germany, which removed more volatile energy and food prices, fell from 3.7 percent to 3 percent.

Part of the price drop was mechanical, for last year’s inflation increase of 1 percentage point from the reversal of a reduction in VAT has now fallen out of the comparison from year to year.

Spanish inflation of 6.1 percent in January fell from 6.5 percent in December, its highest year-on-year increase since 1992. Compared to the previous month, prices fell 0.9 percent. But annual core inflation in the country rose from 2.1 to 2.4 per cent.

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