Inflation rates of just under 6 percent and an early end to the economic recovery in germany: the outlook for the end of the year has dimmed amid rising corona figures.
The bundesbank considers a jump of the harmonized consumer price index HICP, which is used by the ECB for its monetary policy, to almost 6 percent in november possible, according to the monthly report of the german central bank published on monday. At the same time, the economic recovery was allowed to take a breather in the fourth quarter.
Inflation rates of 6 percent last seen in 1992
The last time the federal statistical office calculated inflation rates of around 6 percent was in 1992, according to the consumer price index, which is measured only for german purposes. The HICP did not exist then. In october of this year, higher energy prices in particular had pushed up HICP inflation to 4.6 percent.
The bundesbank attributes part of the rise in consumer prices to special effects such as the temporary reduction in value-added tax in germany from summer 2020 in the corona crisis. Since the beginning of this year the old tax rates apply again.
The special effect of the value-added tax will cease to apply from january 2022. "Then the rate of inflation should decline noticeably, although the sharp rise in market prices for natural gas will probably not be passed on to consumers for the most part until after the turn of the year," wrote the nottenbank. The experts expect that the rate of inflation will gradually decrease in the following months of the coming year. "But it could remain well above 3 percent for a longer period of time."
Minimum wage could increase wage pressure
In this context, notenbank is critical of the plans of the possible new federal government to raise the minimum wage to 12 euros per hour by the end of 2022. This has had "non-negligible spillover effects" on the wage groups above them, the bundesbank explained. "This too was likely to increase wage pressure in the future." Behind this lies the fear of a spiral of rising prices and rising wages, for which economists see no signs so far.
The european central bank (ECB) is aiming for an annual inflation rate of 2 percent for the 19-country area and is prepared, at least temporarily, to accept a moderate overshoot or undershoot of that mark. From the point of view of the central bank, the current rise in inflation is temporary. Europe’s truthers are therefore not allowing themselves to be pressured into a faster exit from the policy of cheap money. ECB president christine lagarde recently reaffirmed that the central bank would continue to support the economy even after the acute pandemic emergency had ended.
Effects of the rising number of infections
Supply bottlenecks and the corona infection figures are slowing down the economy in germany at the end of the year, according to the bundesbank’s assessment. "The economic recovery is expected to take a breather for the time being," the central bank wrote. The gross domestic product was able to tread water in the fourth quarter.
In the summer, europe’s major economy grew by 1.8 percent compared with the second quarter, according to preliminary data. The consumer’s desire to consume had contributed to this in particular.
According to the bundesbank’s assessment, the growth impetus that emanated from the services sector after the end of many corona restrictions has probably largely run its course for the time being. Some damming measures were also tightened again in view of the rising number of infections. At the same time, industry continued to suffer from supply shortages in the fourth quarter, which put a damper on overall economic growth. Positive growth impetus emanates from the construction industry, according to notenbank’s assessment.
Decline in consumer spending
In the corona year 2020, monthly consumer spending by private households fell by 3 percent to an average of 2507 euros compared to the previous year, according to the federal statistical office. Lockdowns and restrictions on the number of people, for example in leisure and service facilities, led to a downturn, according to the report.
Overall, the bundesbank sees risks from an intensified pandemic throughout the winter half-year. "As things stand, however, the overall economic impact is likely to be less severe than in previous waves of the pandemic."