German facing accelerating inflation

City A.M. Reporter
German consumer prices have risen at their fastest pace since October 2008 this month, data has shown, offering early signs that inflation in the eurozone may be high enough to concern the European Central Bank.

EU-harmonised prices (HICP) grew two per cent year on year in January compared with 1.9 per cent in December.

The hike was partly driven by gains in volatile commodities prices, but analysts said domestic underlying inflationary pressures were increasing and the case for one or more ECB interest rate hikes within months had been strengthened.

"The case for record low interest rates is getting weaker," said Berenberg Bank economist Holger Schmieding, who expects two rate hikes of 25 basis points each in September and December.

Apart from further rises in costs of heating oil and fuels as well as fruits and vegetables, Germany's Federal Statistics Office said January's increase was also due to a national hike in electricity bills to subsidize renewable energy producers.

"Inflation is back in Germany," said UniCredit economist Alexander Koch, who warned of upward pressure on the core inflation rate throughout 2011.

"The recent strong rise in corporate input prices and also selling price expectations signal a clear upward trend in underlying inflation," he said.

Adding to the more hawkish tone, ECB policymaker Lorenzo Bini Smaghi said rises in imported goods prices carried an inflation risk for the euro area, pushing up the single currency and Bund yields.

Germany's HICP accounts for just over a quarter of the weighting for the euro zone-wide data that defines price stability under ECB policy, and inflation there has in the past undercut the euro zone average.

January's figure fractionally surpasses the ECB's target rate for the euro area of close to, but below, two per cent and causes a dilemma for policymakers worried about possible recessions in countries like Greece, Ireland and Portugal.