Germany Far From All-Clear Signal on Inflation, ECB’s Nagel Says

16 June 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – Germany’s inflation problem is far from being over, despite a recent fall in headline inflation numbers, European Central Bank Governing Council member Joachim Nagel said on Friday.

In a press release accompanying the June monthly report of the Bundesbank, which he heads, Nagel said: ‘We are seeing a welcome decline in inflation, but we’re still far from giving the all-clear signal.’

‘Decisive monetary policy action is key to counteracting the economic and societal risks of more persistent inflation’, he added.

The report said that ‘the German economy is set to recover only arduously from the crises of the past three years’, predicting that the German economy ‘slowly regains its footing in the current year, and grows somewhat more strongly over the remainder of the projection period.’

The German economy is set to contract in 2023, with GDP falling by 0.3%, according to the Bundesbank’s projections published in the report. GDP is then expected to grow by 1.2% in 2024 and 1.3% in 2025. The 2023 number marks a slight improvement from the Bundesbank’s previous forecasts, whilst the longer-term growth outlook has deteriorated due ‘to higher interest rates and decreased competitiveness’, the bank said.

Core inflation was ‘proving to be more persistent than previously anticipated’ and set to peak at 5.2% in 2023, the report said. It would then decline to 3.1% in 2024 and 2.8% in 2025. Headline inflation in Germany was expected to be 6.0% in 2023, 3.1% in 2024 and 2.7% in 2025.

The ‘combination of sharply rising labour costs, a robust labour market, and declining economic output’ was predicted to ‘lead to an exceptionally strong rise in unit labour costs’ and ‘contribute to substantial domestic inflation’.

‘The price pressure driven by labour costs, which is already high, will continue to mount’, the report predicted.

The Bundesbank said that inflation risks were ‘tilted to the upside’ and high inflation ‘could become more entrenched if wages and profits rise even more strongly.’

‘A pass-through of this kind is possible in an environment of high aggregate demand’, according to the report. This underscored ‘the importance of decisive monetary policy action in counteracting more persistent inflation and the economic and societal risks it entails.’