Inflation in Germany to turn positive

Price growth in Europe’s largest economy is likely to be “clearly positive” this month for the first time in half a year, according to the Bundesbank.

After the phasing-out of a temporary sales-tax cut and the introduction of an emissions-pricing scheme, the cost of many goods and services in Germany is likely to have risen on an annual basis, the country’s central bank said in a monthly report published yesterday.

A return to positive inflation rates would mark a noticeable shift compared to the last five months, when the index was negative. That was largely a result of tax cuts introduced to stimulate consumption during the pandemic crisis, weighing on price growth in the wider euro area.

“However, there is uncertainty as to whether the effects of the changed tax rates can be fully reflected in the price statistics in view of ongoing business closures,” the report said, citing Germany’s continued lockdown.

The prospect of resurgent inflation in Germany could help lift it throughout the whole euro region, providing reassurance to European Central Bank officials who have unleashed repeated salvos of stimulus in their attempts to ignite price growth.

“This [2021] could be the first year in a long while in which the ECB’s own inflation projections turn out to be too low,” Carsten Brzeski, global head of macro at ING, wrote in a report. “Lower inflation stemming from negative base effects from lower energy prices, the German VAT reduction and social restrictions deflation are all set to turn into drivers, pushing headline inflation towards 2%.”

In its report, the Bundesbank also noted that recent signs of resilience in the economy “give reason to hope that the restrictions that were extended and tightened at the beginning of the new year will not set the economic recovery too far back”.

“However, if the infection rate doesn’t subside significantly and the current restrictions on economic activity last longer or are tightened even further, it could lead to a noticeable setback,” it added.

This (2021) could be the first year in a long while in which the ECB’s inflation projections turn out to be too low.

Carsten Brzeski

Global head of macro at ING