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German inflation to stay in double digits despite gas price brake, Bundesbank says

FILE PHOTO: The sun sets behind the skyline of Frankfurt

FRANKFURT (Reuters) - Inflation in Germany may well remain in double digits into next year despite the government's efforts to curb energy prices, the Bundesbank said on Wednesday.

With consumer prices in Germany rising by 11.6% last month, their fastest pace since the early 1950s, Berlin is trying to cap a surge in energy bills that mirrors an explosion in the market price for natural gas following Russia's invasion of Ukraine.

But the Bundesbank said the effect of this so called "brake" on gas prices may not become immediately visible, and would only be temporary anyway.

"The inflation rate could stay in double digits also beyond the turn of the year," the German central bank said in its monthly report.

It added the first leg of the government's plan, which will see it foot gas bills in December, would bring relief to consumers but may not register in the official inflation calculation.

The second, more significant part of the plan, in which 80% of households' and small companies' gas consumption will be subsidised, may knock 1 percentage point off inflation.

But only while it lasts.

"As soon as the gas and electricity price brakes expire, the effect on the inflation rate will reverse," the Bundesbank said.

The Bundesbank, which is a vocal supporter of the European Central Bank's efforts to curb inflation via a steady diet of interest rate hikes, took some comfort from the latest wage deals in the German chemical and metal sectors.

Workers in those industries agreed to what will likely prove to be below-inflation pay increases in return for one-off compensation payments.

"From a macroeconomic perspective, it makes it easier to return to lower wage increases when the temporary components expire," the Bundesbank said.

"This could reduce the extent of second-round effects on the inflation rate, especially in the medium-term, and help ensure that the current high inflation rates do not further solidify."

It warned, however, that union demands, such as the 10.5% increase put forward for public-sector workers, were "exceptionally high".

The Bundesbank also reiterated its long-standing call for a recession in the last quarter of this year and the first quarter of 2023.

(Reporting By Francesco Canepa; Editing by Alex Richardson)