German inflation rebounded in February, defying forecasts of a drop and adding to signs that the European Central Bank will need to raise eurozone interest rates to record levels to tackle stickier than expected price pressures.
The acceleration in German consumer price growth to 9.3 per cent in the year to February, up from 9.2 per cent in January, mirrors similar rises in French and Spanish inflation. Economists polled by Reuters had expected a dip in German inflation to 9 per cent.
Eurozone government borrowing costs rose on the news as investors bet on further significant ECB rate increases. The German government’s two-year borrowing costs rose 0.07 percentage points to 3.21 per cent, their highest level since the 2008 financial crisis.
Swap markets are pricing in a jump in the ECB’s deposit rate to 4 per cent later this year, up from the current 2.5 per cent. That would overtake the benchmark’s 2001 peak of 3.75 per cent, when the ECB was still trying to shore up the value of the newly launched euro.
“The ECB still has work to do,” said Ralph Solveen, an economist at German lender Commerzbank, predicting that while inflation was likely to fall this year, it would remain high, “especially as the next wave of costs is heading for companies with much stronger wage increases on the horizon”.
German energy price growth continued to slow in February but this was more than offset by increases in food and services inflation in the period, according to an initial estimate published by Destatis, the German statistical agency, on Wednesday.
Consumer prices rose 1 per cent between February and January, up from 0.5 per cent from January to December — a rise that economists said showed last year’s energy shock was still feeding through into other goods and services prices. The rise in the month-on-month rate also highlighted the recent pick-up in European wage growth.
The figures indicate eurozone inflation may prove more persistent than previously thought. They come ahead of the publication of February price growth data for the bloc on Thursday, which economists expect to show a slowdown to 8.2 per cent, from 8.6 per cent in January.
Germany’s central bank president Joachim Nagel, one of the more hawkish members of the ECB’s rate-setting governing council, said on Wednesday he expected inflation to fall “only gradually,” warning that “above-average wage increases are likely to be increasingly reflected in prices”.
Nagel warned of “a great danger” that high inflation would “continue to eat into our lives”.
The Bundesbank president said interest rates needed to be “sufficiently high” and to stay there “until we see strong enough evidence in the data and projections for inflation to return to our 2 per cent medium-term target”. The ECB has raised rates by 3 percentage points since the summer and has signalled it intends to raise borrowing costs by a further half-point this month.
“To act hesitantly now, to end the tightening early, or even to relax it, would be a cardinal mistake,” Nagel said, calling on the ECB to speed up the shrinking of its balance sheet from the €15bn monthly reduction starting in March to €20bn when this pace is reviewed in July.
Melanie Debono, an economist at research group Pantheon Macroeconomics, calculated that German core inflation — a measure central bankers focus on as it excludes energy and food to show underlying price pressures — rose from 5.4 per cent in January to 5.7 per cent in February.
Debono forecast core inflation in the overall eurozone would also rise to a new record high of 5.5 per cent in February, predicting this would be a key factor to “support the idea of the ECB continuing its string of 50 basis point rate hikes into the start of the second quarter”.
