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Near 50-year high German inflation strengthens case for larger ECB rate rise

·2-min read
FILE PHOTO: Full shelves with fruits are pictured in a supermarket during the spread of the coronavirus disease (COVID-19) in Berlin

BERLIN (Reuters) -German inflation rose to its highest level in almost 50 years in August, beating a high set only three months earlier, data showed, strengthening the case for the European Central Bank to go for a larger basis-point interest rate increase next month.

Consumer prices, harmonised to make them comparable with inflation data from other European Union countries (HICP), increased by 8.8% on the year, following an unexpected 8.5% rise in July, the federal statistics office said on Tuesday. The reading was in line with a Reuters poll of analysts.

The rise comes despite government measures meant to stifle inflation, including cheaper public transit tickets and a fuel tax cut, that are set to end on Aug. 31. Without any follow-up measures, analysts predicted inflation in Europe's largest economy could reach double digits before the end of 2022.

"Judging by the current inflation rate and what is still to come, the ECB should actually launch a jumbo interest rate step," said VP Bank chief economist Thomas Gitzel.

The ECB raised its deposit rate by 50 bps to zero in July and a similar move was expected for September until recently, but a host of policymakers made the case for discussing a 75 bps increase as well.

At 8.9%, euro zone inflation is already more than four times the ECB's 2% target and could exceed 10% in the coming months.

German inflation rose to 8.7% in May, which had marked the first time since winter 1973/1974 - when the first oil crisis led to a new and difficult-to-tame inflationary cycle - that inflation had been so high, the office said at the time.

Energy price increases as a result of the war in Ukraine have been the primary driver behind higher inflation; August's energy prices were 35.6% higher than the same month last year.

(Reporting by Miranda MurrayEditing by Madeline Chambers and Nick Macfie)