In Germany, Inflation Just Flew Off The Charts

German inflation accelerated at the fastest pace in decades in March, preliminary figures released on Wednesday showed.

In what I think it’s fair to describe as a disastrous result, headline consumer prices rose 7.3% YoY this month, more than a full percentage point hotter than expected. The top-end of the range was 7.5%.

The harmonized gauge was even worse, printing a 7.6% annual increase, up two percentage points from February’s YoY gain. The figure (below) is harrowing indeed. Only one economist predicted a comparably high print.

Energy costs surged almost 40%, food prices more than 6%. “Since Russia’s attack on Ukraine, the prices of natural gas and mineral oil products have markedly increased again and have had a considerable impact on the high rate of inflation,” Germany’s statistics office sighed.

The eye-watering figures came on a day when Berlin activated the first phase of an emergency energy plan in the face of Kremlin demands that Europe pay Russia for gas in rubles. In a somewhat bombastic warning, the president of Germany’s chemical workers union spoke of “exploding energy prices” and a prospective halt to industrial activity in the country in the event of a worst-case scenario.

“A similarly high inflation rate in Germany was last recorded in autumn 1981,” the official release said, citing “additional factors” including supply chain disruptions due to COVID and “marked increases” in upstream energy product prices.

“At 7.3% YoY, headline inflation is at its highest level since April 1974,” ING’s Carsten Brzeski wrote, in a colorful note, adding that “the last time inflation was that high, Germany was about to win the football World Cup for the second time, Sweet’s ‘Teenage Rampage’ was number one in the official singles chart top 100 in Germany and ABBA had just released its career-shaping song ‘Waterloo’.”

It’s notable that economists were unable to get close to the mark despite knowing the figures would be bad. That suggests things are deteriorating more rapidly than expected. Earlier, figures out of Spain showed inflation jumping almost 10%, far more than the 8.4% estimate.

This piles pressure on the ECB although, as ever, it’s not obvious that hiking rates is the medicine unless the idea is to engineer demand destruction, something no (modern) central banker will countenance.

Speaking in Cyprus, Christine Lagarde said Europe is entering what she euphemistically described as a “difficult phase.” Inflation will be higher and growth slower in the short-term, Lagarde mused. The war, she lamented, represented a “significant economic shock.”

For his part, the ECB’s Madis Muller said simply, “War means higher inflation.”

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One thought on “In Germany, Inflation Just Flew Off The Charts

  1. The confusingly weird thing in this era is the classic disconnected distortion between inflation and central bank rates. I can honestly say I don’t understand this new relationship and clueless as to what it means. Theoretically, rates follow inflation trends, so apparently German rates will have to go full Volker, in hopes that pouring jet fuel on the bonfire will suck the oxygen out of the explosion. It just seems risky playing with fire.

    I am not German and have carefully crafted this opinion to be taken with a grain of salt.

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