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German inflation hits highest rate for almost 30 years in setback for Olaf Scholz

·2-min read
German Chancellor Olaf Scholz
German Chancellor Olaf Scholz

Germany’s inflation woes have deepened after the biggest surge in prices for almost 30 years, in a setback for the new Chancellor, Olaf Scholz.

Europe’s biggest economy endured inflation of 5.3pc in December, the highest rate since June 1992, driven by soaring energy costs and the impact of a previous VAT cut.

The latest rise prompted pledges from the German finance minister, Christian Lindner, to support households hit by the price crunch.

Energy bills have soared after a tripling of wholesale gas costs last year, while the volume of gas flowing to Europe through pipelines from Russia is at its lowest level since 2015. “We have to do something,” Mr Lindner said.

The runaway inflation marks a grim first week for the new head of the Bundesbank, Joachim Nagel, and will also stoke further tensions between inflation-wary Germany and the European Central Bank.

German savers have been hammered by eight years of negative interest rates and a huge €1.85 trillion Covid money-printing programme by the ECB, prompting calls from economists for the central bank to “take its foot off the gas” and rein in stimulus.

German inflation averaged 3.1pc last year, the highest annual figure since 1993.

Jorg Kramer, chief economist at Commerzbank, said: “The inflation risks are clearly pointing upward – not only for Germany, but also for the eurozone. It's time for the ECB to take its foot off the gas.”

Although December should mark the inflation peak, economists warned that rising costs are becoming more entrenched across the German economy.

Carsten Brzeski at ING said: “High inflation is no longer only concentrated in a few sectors or a few goods. Almost half of the 92 largest components of the inflation basket currently have an inflation rate of 4pc or more. A year ago, this was less than 10pc … it is hard to see inflation coming down significantly any time soon.”

Andrew Kenningham at Capital Economics said: “For policymakers, what matters most is the evolution of core goods and services inflation and, so far, the survey evidence suggests that underlying price pressures remain very strong.”

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