German Inflation Hits 50 Year High

Issue 125

German inflation rose to its highest level in nearly half a century in May on the back of soaring energy and food prices, strengthening the case for a big, half a percentage point European Central Bank interest rate hike in July.

Prices have risen sharply across Europe over the past year, first on supply chain problems after the pandemic, then on Russia's war in Ukraine, suggesting that a new era of rapid price growth has swept away a decade of ultra low inflation.

German consumer prices, harmonised to make them comparable with inflation data across the European Union, increased to 8.7% from 7.8% a month earlier, well ahead of expectations for 8%, data from the Federal Statistics Office showed on Monday.

Inflation was last time this high in the winter of 1973/1974, when the first oil crisis led to a new and difficult-to-tame inflationary cycle.

Although the ECB responded to soaring prices relatively late compared to its global peers, the bank made clear last week that interest rates must go up to stop high inflation from getting entrenched.

Now the question is the size of its upcoming moves.

While ECB chief Christine Lagarde and chief economist Philip Lane made the case for gradual, 25 basis point hikes in July and September in the minus 0.5% deposit rate, economist said a bigger, 50 basis point increase is very much a possibility.

Source: Reuters