Wednesday, 28 November 2007

German Inflation Accelerates; Fastest Since 1996

"German inflation accelerated in November to the fastest pace since records began in January 1996, led by surging oil and food costs. "

"Today's inflation figures are catastrophic, putting upward pressure on euro-region data,'' said Karsten Junius, an economist at Dekabank in Frankfurt. "Nobody expected them to be like this.''

"Workers across the euro region are already pressing for more pay, threatening to unleash a price spiral. Deutsche Bahn AG, Germany's state-owned railway, on Nov. 24 proposed a pay increase of as much as 13 percent after nationwide strikes."

"What will certainly hold our attention the most is whether these rising oil prices lead to secondary effects,'' Mersch, head of Luxembourg's central bank, said. "That would then trigger a monetary response.''

"Money-supply growth in the euro region accelerated more than economists forecast in October to the fastest pace in more than 28 years, adding to the European Central Bank's inflation concerns. "

German inflation data is very important for the whole Eurozone as Germany is the biggest economy in Europe. For some economists, the ECB seems to have failed in its mandate and is starting to lose credibility.
However the ECB is in a very difficult position, on one hand they have to deal with a credit crisis that has the potential of slowing down sharply the Eurozone economy and the other a rising inflation that is reducing the purchasing power of its 350 Millions citizens.

Another problem is that nowadays inflation is mainly coming from outside (oil, food, clothing etc...), the ECB has no control of that. China moved from deflation importer to inflation creator. The Chinese don't want to reevaluate their currency, creating an overheating economy and triggering a boom in commodities price. The artificially weak currency is now triggering a trade war that is pushing the US and the EU to pressure the Chinese.

The EU
should have raise the interest rates in September, they announced it back in June and roll it back after the crisis started in the summer. They are now in the "wait and see" mode ready to "pull the plug" . There is a chance that an increase of interest rates is in the card next year if the inflation is not abating.

In Finland, we are already seeing the "second round" effect (strikes, higher pay and company passing their cost to consumers...). Interests for Finland should have been higher in order to cool down the demand, unfortunately Finland cannot decide its interest rates...

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