Germany’s inflation to average 4% in 2022 – Ifo

MADRID (ICIS)–Germany’s rate of inflation could average 4% in 2022, the Ifo economic institute said on Monday, a sharp increase from its December forecast of 3.3%.

Ifo upgraded inflation expectations after its latest survey revealed that companies in all economic sectors are thinking about raising prices further in the months ahead.

Exporters in Germany’s manufacturing sector are also understood to be planning prices rises.

“Companies are passing the increased cost of energy and of procuring intermediate products and merchandise on to their customers. Those increases will filter down to consumer prices,” said Timo Wollmershauser, head of forecasts at Ifo.

“This means monthly inflation rates will remain above 4% for a while.”

In its latest survey, Ifo said manufacturing – including the key automotive industry – stood at a very high 55.6 points, but was still less that for wholesale at 60.3 points and retail at 57.7. The service sector hit a new high of 41.9 points and in the  petrochemical-intensive construction industry, the figure was 41.5 points.

The balance values for price expectations indicate the percentage of companies that intend to increase prices minus the percentage of companies that intend to lower their prices.

If all the companies surveyed intended to increase their prices, the balance would be plus 100 points. If they all wanted to lower their prices, it would be minus 100.

–

HIGH INFLATION, HIGHER INTEREST RATES?
Inflation in the eurozone – of which Germany is the largest economy – has rocketed in the past 12 months; in January, it stood at 5.1%, according to statistics body Eurostat, similar to that of Germany’s.

The figure is more than double the European Central Bank’s (ECB) target to keep inflation at around 2% in the 19-member country currency union – a move that could prompt it to raise interest rates this year, according to some analysts.

ECB president Cristine Lagarde said last year that interest rates would not rise in 2022, but after last week’s monetary policy committee in Frankfurt – which kept rates unchanged – she avoided repeating the claim.

Interest rates on refinancing operations, marginal lending, and deposit facilities were unchanged at 0.00%, 0.25%, and -0.50%, respectively.

Analysts at Germany’s Deutsche Bank highlighted on Monday how some members at the ECB’s governing council have already endorsed rates hikes to contain inflation.

In general, higher interest rates tend to slow consumption as returns on savings are higher and as consumers save instead of spend, which in turn can cause inflation to decrease.

In a low-interest rate environment – such as the one seen in most major economies since the 2008 financial crash – more consumers can borrow money and have more disposable income – leading to prices increase as the economy grows.

“Over the weekend, ECB governor [Klaas] Knot became the first ECB official to endorse a 2022 hike by suggesting that he expects a hike around Q4 and another in spring 2023, and that they are most likely to be in 25 bps [basis points] increments,” said analysts at Deutsche Bank.

“He also suggests bond purchases should end as soon as possible and that eurozone inflation will remain above 4% all this year. There will be excitement about the comments in markets today [Monday] but pricing is already above 50bps before year-end so as the ECB catch up with the market, will the market now go another step further?”