‘Spending power melting’ German economy in freefall as inflation hits 40-year high

Germany's reliance on Russian gas addressed by Eva Maydell

We use your sign-up to provide content in ways you’ve consented to and to improve our understanding of you. This may include adverts from us and 3rd parties based on our understanding. You can unsubscribe at any time. More info

Inflation in Germany has continued to climb despite predictions of a decrease putting more pressure on the European Central Bank to begin raising interest rates. Previous forecasts had suggested inflation would dip from 7.3 percent in March to 7.2 percent in April however flash estimates for April instead point to a continued rise. According to official statistics body Destatis inflation for April is expected to be 7.4 percent. Analysts had previously thought a fall in energy inflation would bring down Germany’s overall rate with oil prices in particular coming down from record highs due to a demand slump from China.

According to Destatis, energy inflation has indeed decreased, falling from 39.5 percent last month to 35.3 percent for April.

However, this has been offset by a rise in food inflation which rose from 6.2 percent to 8.5 percent.

Meanwhile services also saw a slight rise in inflation.

The overall reading takes inflation in Europe’s largest economy to its highest levels since 1981 when the Iran-Iraq war produced similar inflationary shocks on oil prices.

With inflation in Germany refusing to fall, pressure is set to grow on the European Central Bank (ECB) who have so far resisted raising interest rates, unlike counterparts the US Federal Reserve and Bank of England.

In recent comments to CBS the bank’s president Christine Lagarde insisted inflation was “a different beast” in Europe with action by the ECB unable to lower energy prices.

However others in the ECB have begun to hint at more intervention with Governing Council member Martins Kazaks saying up to three hikes were possible by the end of the year.

Writing in a briefing not Carsten Brzeski, Global Head of Macro at ING Think, observed: “With the last ECB meeting and recent comments by ECB officials, it is clear that a consensus view has emerged on ending the so-called unconventional measures, ie net asset purchases and negative deposit rates before the end of the year.

“The only open issue is the timing.”

The ECB has been characterised as typically slow to act however some suggest with growing signs of longer lasting inflation the bank could be spurred into action as early as July this year.

Jesús Cabra Guisasola, Senior Associate at Validus Risk Management, said: “These inflation figures will put further pressure on the ECB to exit stimulus and start hiking interest rates to mitigate historical inflation prints.

“Market has moved quite rapidly to price an aggressive hike cycle from the ECB which could start in July with 25bps increase and with the terminal rate back to positive territory by Dec 2022.”

DON’T MISS: 
Barclays sees earnings soar off rising interest rates [REVEAL] 
Turkey in meltdown: Erdogan faces 42% inflation nightmare [SPOTLIGHT] 
UK car production hammered by Chinese lockdowns and Russia war [LATEST] 

Back in Germany soaring prices are increasingly weighing on consumer sentiment according to survey data also released this week.

The GfK Consumer Confidence index dropped well below forecast to -26.5 indicating a pessimistic outlook for income expectations and willingness to spend on large purchases.

Melanie Debono, Senior Europe Economist at Pantheon Macroeconomics, described the figures as “a clear sign that households are not happy seeing their spending power melt away, as inflation has continued to soar.”

Source: Read Full Article