German inflation hits 3.0 percent in November
FRANKFURT (AFP) — German inflation reached its highest level since 1994 in November, spiking to 3.0 percent according to provisional data released Tuesday.
On top of rising oil prices, the soaring cost of food items such as dairy products and cereals pushed inflation sharply higher as the country approaches the start of winter.
While the trend of rising prices is similar in other eurozone countries, German inflation is the first to reach the symbolic 3.0 percent threshold, exceeding a consensus analyst forecast of 2.8 percent.
The rise in consumer prices comes amid signs of slowing economic growth in Germany, the biggest economy in the eurozone, and presents the European Central Bank with "quite a challenge," UBS economist Martin Lueck noted.
Analyst Sylvain Broyer at investment bank IXIS-CIB added: "The ECB has now to deal with an extremely uncomfortable kind of baby-stagflation with an evident conflict of objectives."
Policymakers from the ECB, which has an official inflation target of close to but below 2.0 percent, will gather on December 6 in Frankfurt for their regular rate-setting meeting.
The German government has lowered its growth forecast to 2.4 percent this year and 2.0 percent in 2008, down markedly from the brisk 2006 pace of 2.7 percent.
Deputy Economy Minister Walther Otremba said in an interview Monday that the euro's climb against other major currencies could force another revision downwards as the cost of German exports rose on international markets.
Consumer price increases are clearly evident in stores. In the western state of Hesse, the cost of butter has jumped by 48 percent over the past year and fuel prices have shot up by 26 percent.
Lettuce, meanwhile, costs 74 percent more in eastern Saxony than it did in November 2006.
For the provisional inflation figure, Destatis collected data from six key German states, with a final figure to be published on December 14.
Given the results, it was not surprising that a business confidence survey by the Ifo institute released earlier Tuesday showed a sharp drop in the retail sector just ahead of the crucial Christmas shopping season.
"German households are probably increasingly hit by the steep acceleration in inflation," said an economist at Bank of America, Gilles Moec.
Lueck added that the price surge did not come as a surprise.
"We knew that annual inflation would pick up after the summer," he said.
A study by the Mercer consulting group published Monday showed German wages were rising less quickly than in other western European countries, which meant that buying power was falling.
If calls for higher salaries start to spread across the country, where train drivers have already staged strikes to back up their demand for a 31 percent increase, it could lead to a second round of more structural price increases, economists warn.
The European Central Bank has pointed several times to such a threat.
In October, inflation stood at 2.4 percent in Germany, but economists and the ECB had forecast a spike in consumer prices for some time, adding that it should begin to ease in 2008.
A figure for the entire 13-nation zone is due for release on Friday, with Broyer forecasting it could now hit 2.9 percent, up from 2.6 percent in October.
He nonetheless estimated that "for now, the acceleration in inflation is insufficient to trigger a hike in ECB interest rates."
