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German inflation soars close to ECB target, but domestic consumers may suffer
January 3, 2017 / 10:53 AM / in 7 months

German inflation soars close to ECB target, but domestic consumers may suffer

A woman checks vegetables at the Biocompany organic supermarket in Berlin, January 31, 2013.Fabrizio Bensch

BERLIN (Reuters) - German inflation jumped to within a whisker of the European Central Bank target in December, hitting the highest level in more than three years and providing the euro zone bank with evidence its loose monetary policy is working.

The surprisingly strong surge in consumer prices, however, may put a damper on Germans' appetite for shopping as higher inflation means consumers have less real income to spend.

German consumer prices, harmonized to compare with other European countries (HICP), rose by 1.7 percent on the year after an increase of 0.7 percent in November, the Federal Statistics Office said on Tuesday.

The reading, close to the ECB's inflation target of at or just below 2 percent, was the highest inflation rate since July 2013 and stronger than a Reuters consensus forecast of 1.3 percent.

The strong recovery gives conservatives like Bundesbank President and ECB rate-setter Jens Weidmann more scope to argue for winding down the ECB's bond-buying program more quickly.

The ECB has been pouring money into the euro zone economy in an attempt to boost inflation from a near-deflationary level, and Tuesday's strong data intensified calls from fiscal conservatives to start reversing the ECB's stimulus.

"This jump in inflation is a signal to exit from the ECB's expansive monetary policy," Ifo chief Clemens Fuest told the Frankfurter Allgemeine Zeitung. "If these figures are confirmed for the euro zone as a whole (on Wednesday), the ECB should end the bond buy program in March 2017."

Politicians from Chancellor Angela Merkel's conservative CDU/CSU bloc echoed Fuest's call.

"The policy of zero interest rates, coupled with rising inflation, is devastating for German savers," Bavarian Finance Minister Markus Soeder told Handelsblatt business daily.

A breakdown of the non-harmonized inflation data showed rising energy prices and higher food costs were the strongest drivers behind the overall increase.

DZ Bank economist Michael Holstein said negative base effects of past oil price drops were now fading out, meaning German inflation was likely to reach the ECB's target of nearly 2 percent in the coming months.

"For the whole of 2017, German inflation will rise to some 1.5 percent - roughly one percentage point higher than in the past year," Holstein said.

The data means that Wednesday's wider euro zone figure will probably come in stronger than expected as well

Economists polled by Reuters predict the euro zone HICP inflation figure will rise to 1.0 percent from 0.6 percent in November. Capital Economics analyst Jennifer McKeown said she now expected a sharper increase to around 1.2 percent.

Still, price pressures elsewhere in the euro zone remain more muted than in Germany, she added, pointing to French annual HICP inflation only creeping up to 0.8 percent in December after 0.7 percent in November.

"Accordingly... we doubt that this will lead the ECB to reconsider its policy support," McKeown said.

DENT TO REAL INCOMES

While rising prices may be good news for the ECB from a pan-euro zone perspective, they do not necessarily bode well for the German economy. It has been relying on private consumption, a booming construction sector and government spending for growth.

"Indeed, a temporary energy-related rise in inflation this year will dent real incomes growth, which is a key reason why we expect the economic recovery to slow," McKeown said.

The German government expects the economy to have grown by 1.8 percent in 2016 and predicts growth to slow to 1.4 percent this year, mainly due to fewer workdays and weaker exports.

Still, economists expect Germany's labor market to remain robust in 2017.

The Federal Labour Office said on Tuesday that unemployment fell more than expected in December, keeping the jobless rate at a record low.

"The strong increase in employment that has been going on for a long time slowed since the summer months, but demand for new workers remains at a high level," said Frank-Juergen Weise, head of the Federal Labour Office.

The seasonally adjusted jobless total fell by 17,000 to 2.638 million, the Labour Office said. That was more than three fold the 5,000 forecast in a Reuters poll.

The adjusted unemployment rate remained at 6.0 percent, the lowest level since German reunification in 1990.

In 2016 as a whole, a record 43.4 million people were employed in Germany - 1 percent more than in 2015 and the tenth consecutive year that the workforce expanded.

"Job creation should continue this year," said Joerg Zeuner of KfW bank. "The expected rise in unemployment due to immigrants has so far not materialized."

More than one million migrants, mainly refugees from the Middle East and Africa, arrived in Germany over the last two years. The government is investing billions on integrating them.

Editing by Jeremy Gaunt

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