2.5 percent

German inflation rises - but no one is worried

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Ka-ching. Source: Reuters

Rising inflation has often been a cause for concern. But in Germany, local economists are cheering an annual inflation rate of 2.5 percent – that is well beyond the central bank’s target of just under 2 percent and the highest level in 10 years.

The reason is that the October price rise indicates a robust economy and an increase in wages, another sign of progress as Germany finally recovers from the effects of the financial crisis.

Additionally, the price rise doesn’t engender the usual angst in Germany because much of the increase is due to rapidly rising energy prices, which tend to fluctuate considerably. The so-called core inflation – stripped of volatile energy and food prices – was only 1.7 percent, according to economists at Commerzbank. Core inflation often indicates whether changes will be an ongoing trend.

The nominal inflation rate marked an increase from 2.3 percent in September, while core inflation then was just 1.5 percent.

Higher but not higher

In the euro zone as a whole, according to separate figures released by Eurostat, core inflation in September was just 0.9 percent. Nominal inflation was 2.1 percent.

Commerzbank economist Marco Wagner attributed the higher nominal inflation throughout the euro zone as well as in Germany to more expensive package tours as well as to energy prices. And in fact, without those temporary impacts, Germany’s core inflation only rose a little, he said.

In addition to higher energy prices, Germany was finally able to move the needle up on wages, and this helped lift core inflation above the rest of the euro zone. “The disparity between Germany and the euro zone is due above all to different wage development,” says Commerzbank’s Wagner. This is also seen as a good thing because it allows other euro zone countries to become more competitive and potentially goes toward evening out some of the disparities within the currency union.

The European Central Bank, or ECB,  has been trying for years to boost inflation and steer clear of the deflationary spiral brought on by declining prices.

Employment fuller but not yet full

Wagner expects core inflation in Germany to reach 2 percent by the end of next year, but for the euro zone as a whole to stay on about 1.4 percent. If the ECB wants to achieve inflation of just under 2 percent for the whole euro zone than Germany’s rate needs to stay above 2 percent.

Not coincidentally, unemployment in Germany hit new lows, dipping below 5 percent in October for the first time since German reunification in 1990. The 4.9 percent registered in October is still not near what economists consider full employment. For one thing it is spread unevenly across the country with prosperous regions in southern Germany closer to 3 percent or even below.

Historically, low unemployment has led to higher inflation as labor shortages create a wage-price spiral, but that has been largely absent from the recovery in Europe so far, as well as in the US.

Jan Mallien covers monetary policy for Handelsblatt. Darrell Delamaide adapted this story into English for Handelsblatt Global. To contact the author: mallien@handelsblatt.com.

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