German Bundesbank: German Inflation Could Temporarily Hit 4% Towards End-2021

21 May 2021

By David Barwick – FRANKFURT (Econostream) – Inflation in Germany could temporarily hit 4% toward the end of the year, the German Bundesbank said on Friday in its latest monthly bulletin, an increase from recent previous monthly bulletins in which it had only predicted German HICP rates ‘clearly’ above 3%.

‘In the coming months, the inflation rate should continue to rise slowly at first’, the Bundesbank said, with ‘upstream price pressures … likely to be reflected in consumer prices only to a lesser extent and with a lag.’

As of July, the base effect stemming from the reduction of the VAT will boost annual HICP, though this effect would be offset for some months by the statistical special effect of package holidays, the German central bank said.

‘At the end of the current year, however, this special effect will again strengthen the upward pressure on prices’, the Bundesbank said. ‘Therefore, the inflation rate could then temporarily reach 4%.’

German GDP would ‘increase significantly’ in 2Q, with the degree of the expansion dependent on when pandemic containment measures are lifted, it said.

Although industry is experiencing high demand, bottlenecks in the supply chain would reduce production for the moment, the Bundesbank said.

‘With rapid progress in the vaccination campaign, there is a prospect that containment measures can be eased significantly in the coming months’, the central bank said. ‘GDP could then rise strongly in the third quarter and exceed its pre-crisis level as early as autumn.’

The Bundesbank suggested that globally, in the context of vaccination progress, ‘[a]broad opening of the economy seems possible here by summer at the latest. The global economic recovery should thus gain significant momentum.’