Frankfurt The inflation rate in Germany continued to rise in April. Consumer prices increased by 7.4 percent compared to the same month last year, as the Federal Statistical Office announced on Thursday based on an initial estimate. That’s the highest level since the fall of 1981. Economists had expected it to remain at March’s 7.3 percent level.
Energy prices rose 35.3 percent after 39.5 percent in March. Grocery prices rose 8.5 percent. Goods increased by 12 percent and services by 2.9 percent.
At the beginning of the year, the price trend was stronger than initially assumed. It is currently being exacerbated by the war in Ukraine. Russia is one of the main exporters of oil and gas, but also of some metal commodities such as palladium, wheat and fertilizer components.
The persistently sharp rise in prices is putting the European Central Bank (ECB) under pressure. She is actually aiming for an inflation rate of two percent for the euro area. Since last year, however, it has been significantly higher.
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ECB President Christine Lagarde has recently emphasized several times that the central bank pays particular attention to wages because they are very decisive for further price developments. Economists fear a wage-price spiral in which both factors reinforce each other.
At her press conference in mid-April, Lagarde pointed out that the data so far does not indicate stronger wage dynamics, but that it will take time for such a process to become visible. The situation in the euro area is different. However, the longer inflation remains at a high level, the greater the risk.
Wage demands by the IG Metall trade union for the steel industry have recently caused a stir in Germany. She wants to demand 8.2 percent more wages there. The demand is “certainly high,” says the economist at the US bank JP Morgan, Greg Fuzesi. From his point of view, this also applies if you consider that the collective bargaining usually results in much less than the unions are demanding. According to Fuzesi, collective bargaining in the steel industry is therefore an important test case.
Fuzesi also points out that the Bundesbank’s indicators for the monthly development of negotiated wages have recently turned out to be higher than in the previous year. The value was 2.2 percent in January and 4.2 percent in February. This also includes one-off payments and bonuses. Even if the values fluctuate strongly in some cases, the overall trend there is significantly higher than last year.
Commerzbank chief economist Jörg Krämer also sees the danger of a wage-price spiral. However, he points out that the collective bargaining parties in Germany agreed on unusually long terms last year due to the pandemic. That is why this year only a third of the employees are due for collective bargaining.
“But next year, labor costs are likely to rise more sharply across the board – especially since there is a shortage of workers in many sectors,” says Krämer. This speaks for an inflation rate well above two percent if you exclude the volatile energy prices.
There is disagreement within the Governing Council as to how the central bank should react. It is in a difficult position: the war in Ukraine is not only driving up inflation, it is also slowing down the economy. More and more economists are now even warning of a recession in large parts of Europe, i.e. a shrinking economy. Even in the US, which is less affected by the Ukraine war, gross domestic product surprisingly fell in the first quarter of 2022.
While interest rate hikes could dampen inflation, they would also further weaken growth in the current difficult environment. Some representatives, such as chief economist Philip Lane or ECB director Fabio Panetta, have expressed skepticism about rate hikes in the near future.
In the past few weeks, however, supporters in particular have spoken out. They hinted at a first rate hike as early as July. Lagarde said on Wednesday that the central bank’s bond purchases would end “with a high probability early in the third quarter, probably in July.” That is the time to “look at interest rates and an increase in interest rates”.
ECB deputy head Luis de Guindos and Bundesbank boss Joachim Nagel had previously made similar statements. The deposit interest rate, which is decisive for monetary policy, is currently minus 0.5 percent.
JP Morgan economist Fuezesi expects a first interest rate hike of 0.25 percentage points “rather in July than in September”. This is roughly in line with today’s market expectations. After that, he expects further steps in September and December and four increases in the coming year. Then the deposit rate would be 1.25 percent.
Because that is still below the neutral rate of around two percent, further steps are then due in 2024, Fuzesi writes in a study. An interest rate that neither slows down nor accelerates the economy is considered “neutral”, although this level can only ever be estimated. According to JP Morgan’s logic, the ECB’s policy would no longer have an expansive effect until 2024.
Jari Stehn, European economist at the US bank Goldman Sachs, also expects bond purchases to stop at the end of June and then expects the same sequence of interest rate hikes as Fuzesi, up to 1.25 percent in the coming year.
A weak economy could lead to a slower succession, explained Stehn. However, should second-round effects become apparent, i.e. wage increases, which in turn drive up prices, then a faster sequence is also possible in return.
More: ECB boss Lagarde promises a rate hike in the summer