German inflation up again as ECB seen hiking rates

AP News
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Posted: Mar 11, 2011 7:27 AM
German inflation up again as ECB seen hiking rates

Consumer inflation crept up for the fourth month running in Germany while wholesale prices rose even more sharply, cementing expectations the European Central Bank will soon crack down on inflationary pressures with an interest rate increase.

The Federal Statistical Office said Friday that consumer inflation in Europe's largest economy ran at an annual 2.1 percent in February. The increase was unexpected after the government had forecast a 2 percent rate based on preliminary figures.

The rise in consumer prices was driven by large increases in energy prices, which were up 10.2 percent compared with February 2010. Food prices were also up 3.4 percent compared with the same month the year before.

The inflation rate was only 0.6 percent a year ago, and sat at 1.3 percent in October 2010 when it began to rise.

More ominously, wholesale prices rose 10.8 percent in February over the same month last year, the highest annual jump since October 1981. Agricultural raw materials such as grain and animal feed rose 82.9 percent and wholesale prices for coffee, tea and spices rose 46.4 percent. Wholesale fruits and vegetables jumped 13.5 percent.

Not all those increases will necessarily be passed on to the consumer, but signs of rising inflation in Europe led the European Central Bank last week to indicate it may raise interest rates soon in an attempt to keep inflationary expectations from creating a wage-price spiral. The bank's goal is to keep inflation just under 2 percent.

Higher interest rates are the bank's chief tool against inflation. Its key rate has been at a record low of 1 percent since May 2009 to support growth during the past several years of economic and financial turmoil.

Economic growth has lead to fears that Germany's workers will begin raising their wage demands. On Thursday night, Germany's public-employees union Ver.di struck a wage agreement for 585,000 workers that kept increases in the wage scale to under 2 percent, winning 1.5 percent from April 1 and 1.9 percent next year.

Employees will get one-time top-up payments that mean they effectively get 2.3 percent and 2.55 percent, keeping them roughly even with inflation without building all of the increase into the permanent wage scale.