German Bundesbank: HICP Could Temporarily Top 3% in Germany in 2H 2021

22 March 2021

By David Barwick – FRANKFURT (Econostream) – Consumer price inflation in Germany could temporarily exceed 3% in the second half of 2021, the German Bundesbank said on Monday.

In its latest monthly bulletin, the German central bank said that HICP would rise over the coming months, driven in part by more expensive crude oil.

‘In the second half of the year, high HICP rates can then be expected temporarily due to the base effect of the VAT cut in the previous year’, it said. ‘From today's perspective, they could clearly exceed 3% at times by the end of the year.’

HICP ex-energy and food in Germany declined from 2.0% on the year in January to 1.7% in February because of a ‘special statistical effect’ that will also have a ‘noticeably positive impact’ on March HICP, according to the Bundesbank.

‘After that, it will temporarily decline to zero before having a noticeably negative impact on inflation from June to October’, the Bundesbank said. ‘On average for the year, this effect will not have a significant impact on the HICP rate.’

Owing to the tightening of pandemic containment measures, GDP in 1Q would probably ‘decline sharply’, especially in those services requiring personal contact, the report indicated, citing ‘significantly’ lower retail sales in January.

The normalised VAT rates likely also had an impact, the Bundesbank said, and in particular ‘may also have contributed to the very substantial decline in construction output in January.’

Industrial production is benefitting from foreign demand and should support 1Q GDP, the Bundesbank said.

‘It is true that industrial production suffered a small setback at the beginning of the year’, the report said. ‘But industrial companies received significantly more orders. Moreover, according to the surveys of the Ifo Institute, their sentiment improved to a good level in February.’