German inflation unexpectedly accelerates in February

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BERLIN — German consumer prices, harmonized to compare with other European Union countries, rose more than anticipated in February, pointing to no let-up in stubborn cost pressures and pushing up European Central Bank rate hike expectations.

EU-harmonized prices rose by 9.3% compared with the same month a year before, preliminary data from the federal statistics office showed on Wednesday, beating analyst expectations of a rise of 9.0% and slightly higher than January’s 9.2% increase.

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Compared to January, prices increased by 1.0%, the office added, also beating forecasts of a 0.7% month-on-month rise.

Prices for food and energy in particular have risen since the start of the war in Ukraine and significantly influence inflation, said the statistics office.

Despite relief measures, energy prices in February were 19.1% higher on the year, while food prices were 21.8% higher, it said.

Underlying pressures have also likely further intensified, said Commerzbank economic researcher Ralph Solveen, with core inflation – excluding energy and food prices – rising to an estimated 5.8% from 5.6%.

“Although the inflation rate may fall in the coming months because energy prices are unlikely to rise as strongly as they did in spring 2022, this does not mean that inflation is over,” he added.

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Commerzbank chief economist Joerg Kraemer told Reuters that there have been two inflation waves. The first one was driven by energy prices and the second one by material inputs, which are not ebbing. Now he expects a third inflation wave, driven by higher wages.

“The labor market is running hot and we will see higher wages,” Carsten Brzeski, global head of macro at ING, told Reuters.

There will one or two years of higher wage growth, which will stabilize consumption, compensating for the loss in purchasing power in the last three years, the economist said.

While energy prices were keeping headline inflation high, wage growth will show its impact in core inflation, which will remain stubbornly high, Brzeski said.

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“If the increase in wages just compensates for the loss in purchasing power, the ECB won’t need to act more aggressively,” Brzeski said.

ECB’S RESPONSE?

The surprise inflation figures from Europe’s largest economy come a day after two of the euro zone’s biggest economies – Spain and France – also posted unexpected rises.

“From the perspective of the ECB, this clearly biases this risk to another 50bp hike in May, after the well-telegraphed 50bp in March,” said JPMorgan economist Greg Fuzesi. “Hence, a stepdown to a 25bp pace of hikes could be delayed, which would also push the terminal rate higher.”

The ECB has raised interest rates by 300 basis points since July and promised another oversized move in March, but some policymakers have called for more measured action after March as inflation is now off the highs it hit in October.

Bundesbank President Joachim Nagel pushed back on those calls earlier on Wednesday, saying recent energy price falls may help bring down inflation in the near term, but they do not impact the medium term and price growth was at risk of getting stuck above the ECB’s 2% target.

“The interest rate step announced for March will not be the last,” Nagel said in a speech. “Further significant interest rate steps might even be necessary afterwards.” (Reporting by Balazs Koranyi and Maria Martinez, Writing by Miranda Murray, Editing by Rachel More, John Stonestreet, William Maclean)