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Germany's inflation hits 70-year high amid warnings of deep recession

This photo taken on April 04, 2022 in Dortmund, western Germany shows the reading of a gas meter to display gas consumption in cubic meters. (File photo by AFP)

Germany’s annual inflation rate has hit a 70-year high amid warnings that energy shortages could do further damage.

According to official statistics published on Thursday, consumer prices in Germany rose 10.9 percent in the year to September.

Preliminary data released by government statistics office Destatis showed the highest inflation reading since December 1951.

Destatis said energy prices have markedly increased and have had a considerable impact on the high rate of inflation. Energy prices rose 43.9 percent in September year-on-year.

Food prices also increased above average, posting a 18.7 percent on-year increase, Destatis said.

Other factors pushing inflation higher are supply-chain problems and significant price increases as the economic recovery got underway, Destatis said.

Experts specifically linked the increase in German commodity prices to the expiry of temporary government measures devised to protect households and businesses from the impact of higher energy prices.

Energy prices soared due to Russia’s decision to cut gas supplies to Europe after the latter imposed sanctions on Moscow over its special military operation in Ukraine.

The embargo has plunged not only Germany, but also the continent, into its worst economic crisis since World War ll ended more than seven decades ago.

Meanwhile, Germany’s top economic institutes warned the country's economy could shrink by 7.9 percent next year if there is an unusually cold winter and an introduction of gas rationing in industry.

“If we get a much colder winter gas consumption will grow significantly, which will increase the likelihood of a gas shortage,” said Torsten Schmidt of the Leibniz Institute for Economic Research. “That will have more of an impact on GDP than we’ve assumed in our forecast.”

ECB eyes jumbo rate hike

European Central Bank (ECB) policymakers on Thursday voiced more support for another big interest rate hike as inflation in the euro zone's biggest economy hit double digits for the first time.

“Inflation is running red hot in Germany,” said Carsten Brzeski, an economist at Dutch bank ING.

Brzeski added that given the rate of inflation it was “hard to see” how the ECB would not raise interest rates to stop investors from moving their capital to other regions.

BBH strategist Win Thin warned that large-scale ECB rate hikes could be quite disruptive for the region’s struggling economy.

Nonetheless, ECB has raised rates by a combined 125 basis points over its last two meetings and promised further increases as sky-high food and energy prices filter into the rest of the economy and intensify underlying price pressures.

"My choice would be 75 (basis points)," ECB policymaker Gediminas Simkus told Bloomberg TV on the sidelines of a conference in Vilnius "But 50 is the minimum."

In the meantime, the high inflation and subsequent rise in ECB's interest rates was denting public trust in the central bank, according to a survey cited by ECB board member Isabel Schnabel.

The euro zone is facing an economic downturn but inflation is still far too high, so interest rates need to keep going up, Schnabel said last week.

"A looming downturn would have a dampening effect on inflation," Schnabel told German news website t-online in an interview. "However, the starting point of interest rates is very low, so it is clear that we need to continue raising rates."

Schnabel claimed the ECB would do whatever it takes to get inflation under control. However, she also hinted that an economic recession in Germany may be unavoidable.

Germany is Europe's biggest economy and experts say a recession in Germany would be detrimental to other European countries, as well.


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