September 27, 2018 / 1:36 PM / in 21 days

Strong German inflation backs Draghi's plan to end stimulus

BERLIN (Reuters) - German inflation picked up more than expected in September to overshoot the European Central Bank’s price stability target, data showed on Thursday, supporting ECB President Mario Draghi’s plan to gradually wind down monetary stimulus.

The Arkaden shopping mall is pictured in Berlin, Germany, March 3, 2017. REUTERS/Fabrizio Bensch

Record-high employment and falling joblessness have led to a tightening labor market in Europe’s largest economy, marked by production bottlenecks, more than a million job vacancies and a series of unusually strong wage deals in several sectors.

German consumer prices, harmonized to make them comparable with inflation data from other European Union countries, rose by 2.2 percent year-on-year after 1.9 percent in the previous month, the Federal Statistics Office said.

This beat a Reuters poll of analysts who on average had predicted 2.0 percent. The ECB targets inflation of close to but below 2 percent for the single-currency bloc as a whole.

“The ECB will be pleased and should continue to follow its chosen path,” KfW chief economist Joerg Zeuner said.

With price pressures building in the euro zone, the ECB plans to wrap up its unprecedented 2.6 trillion euros ($3.04 trillion) scheme of bond purchases by the end of the year, but keep interest rates at record lows “through the summer” of 2019.

“RELATIVELY VIGOROUS”

Draghi predicted on Monday a “relatively vigorous” pick-up in underlying inflation, taken by some investors as a signal for a quicker pace in normalizing policy.

On the month, EU-harmonized prices rose by 0.4 percent, the preliminary numbers showed. That compared with the Reuters consensus forecast for an increase of 0.1 percent.

On a non-harmonized basis, German inflation rose by 2.3 percent year-on-year to hit the highest level since November 2011, the data showed.

Price pressures picked up on a broad basis, suggesting that the rise was also driven by core inflation and not only by the more volatile energy and food components. Germany’s preliminary inflation data do not include a figure for core inflation.

Commerzbank economist Marco Wagner estimated core inflation picked up to 1.5 percent from 1.3 percent in September. This trend will continue in coming months due to the unusually strong wage deals of up to 6 percent in some sectors, he added.

“With today’s surprisingly strong data, we see upwards risks for our forecast for core inflation in the euro zone as well as for our overall inflation estimate,” Wagner added.

The euro zone will publish preliminary September inflation data on Friday, with the annual rate expected to rise to 2.1 percent, according to a Reuters poll.

Reporting by Michael Nienaber, Editing by Maria Sheahan

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