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German inflation could stay above 2%

German inflation is likely to accelerate from its already high level. The Bundesbank said in a monthly report, that it will stay above 2% through mid-2022. Inflation has surged this year on a plethora of one-off factors from tax hikes to supply bottlenecks and commodity price rises, fueling a debate about the need for exceptionally easy monetary policy. The Bundesbank said that the inflation rates between 4% and 5% are possible on a temporary basis. Inflation is then likely to decrease at the beginning of 2022.

The high readings of the past several months are temporary according to the economists. How much of these one-off price pressures may translate into permanent inflation through so-called second round effects, is going on as a debate. Even ECB President Christine Lagarde argues that many of the causes of high inflation are temporary. She also expects some of these factors to linger beyond the pandemic. The ECB expects the price growth to remain weak.

In the same time, conservative policymakers argue that the gap between expected inflation and the ECB’s 2% target is rather narrow. Hence, only a few of these second-round effects would need to materialize to shift inflation higher. On the ECB’s Governing Council, the conservatives are still in a minority. Hence, ultra-easy policy is likely to continue. But the ECB is expected to end a crisis-era stimulus scheme next March. The key debate will be whether to replace this lost support with other measures or not, in the upcoming months.

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