Higher Germany inflation raises pressure on ECB to tighten monetary policy

Jasper Jolly
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Do your Wurst: German prices are increasing (Source: Getty)

Inflation in Germany rose to just short of the target set by the European Central Bank on price stability, raising pressure further on a historically loose monetary policy stance.

Headline inflation rose to 1.9 per cent year-on-year in January, up from 1.7 per cent the month before, according to the German statistics office. Most of the rise was attributed to energy prices, which rose by 5.8 per cent.

Next-door neighbour Belgium also announced rapid price increases, with inflation at 2.65 per cent. Higher inflation in northern European countries sets the scene for a rise in overall Eurozone inflation, which is set to be announced on Tuesday.

Read more: Germany's inflation doubles to highest rate since 2013

In December prices rose at their fastest rate since 2013, reflecting a surging oil price after the Organisation of the Petroleum Exporting Countries (Opec) agreed an historic cut in production. The inflation acceleration has raised outspoken pressure to tighten monetary policy from German economists, including its member of the ECB’s rate-setting governing council.

However, in the last announcement of monetary policy, ECB president Mario Draghi told critics of loose monetary policy to be patient, with core inflation (stripping out more volatile components such as energy) measures still below one per cent across the Eurozone.

Core inflation in Germany in December grew was recorded at 1.49 per cent, while in the broader euro area the rate was only 0.9 per cent.

Higher inflation could harm the wealth of savers (of which Germany has a large proportion). However, Draghi argued the ECB’s sustained presence in bond markets and its zero interest rate would benefit “all citizens of the Eurozone".

Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics, said: "The ECB has assured markets that it will look through a first-quarter surge in energy inflation. That said, the March staff projections will be watched closely for signs of an upgrade in the central bank’s inflation forecast."

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