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Inflation at 6% and economy in a breakdown, Germany scares Europe

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The Bundesbank’s message is directed to the European Central Bank and comes just weeks after Eurotower head Christine Lagarde announces that monetary policy will remain expansive for the whole of next year.

Well, negative rates and a shower of money could translate into a flare-up in prices which in Germany could push inflation up to 6% as early as the end of November. After the increase in prices in October rose to 4.6%. The German central bank puts it in black and white in its monthly bulletin.

Complicating matters further is the generalized distress of the German economy due to the lack of goods, raw materials and labor as well as the new restrictions aimed at fighting the pandemic, which is recording the end of its recent boom.

According to the Bundesbank, inflation in Europe’s largest economy is likely to stay well above 3% for some time and as a result suggests prioritizing wage increases in upcoming negotiations. The economy, in fact, seemed to be recovering in the first half of the year but then slowed down due to supply interruptions and also due to the lack of manpower. For the Bundesbank, this is “a disturbing signal for the global economy”, given Germany’s pivotal position in world supply chains and its role as a growth engine for Europe.

In the medium term, starting next year, prices could fall again with the VAT cut and thanks to other temporary factors. However, the German central bank sees consumer prices rise well over 3% over a long period, with core inflation – which excludes energy and food – substantially above 2%.

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Macroeconomic conditions should also point, according to the central bank, to stronger wage increases for collective agreements to be renewed in the near future. The Bundesbank recalled the ECB’s position that the current surge in inflation is temporary and should not be addressed with a tightening of its monetary policy.

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