German inflation hits 29-year high as energy costs rise in Europe

German consumer prices rose 4.1% in September from a year earlier, the country’s federal statistics office said in a statement. The last time inflation exceeded 4% in Europe’s largest economy was in June 1992, according to Carsten Brzeski, global head of macro research at ING.

Energy alone was 14% more expensive than last year, with food prices rising almost 5%. Other inflation factors include changes to German sales taxes following the pandemic and price increases in leisure and hospitality following the lockdowns.

The picture is similar across Europe. Annual inflation in the 19 countries that use the euro reached 3.4% in September, down from 3% in August and its highest level since 2008, according to a quick estimate released by Eurostat on Friday.

The EU statistical office estimates that annual energy prices rose by more than 17% in September, compared to 15.4% in August. The prices of food and services have also increased.

While some of these price pressures are short-lived, companies in manufacturing and services expect to pass higher costs on to consumers, Brzeski said in a research note on Friday. Labor shortages also have an impact.

“The second channel of transmission will be salaries. The labor market mismatch between the lack of skilled labor and still high unemployment rates as well as a [regionalization] of production due to supply chain friction could result in higher wages, ”he added.

Other economists also believe that inflation in Europe could prove to be persistent, especially given the rise in gas and electricity prices as winter approaches and as supply chains remain limited.

“Further increases in inflation seem a virtual certainty,” said Jack Allen-Reynolds, senior economist for Europe at Capital Economics on Friday. “We now believe that the title [eurozone] rate will reach 4% by November, “he added.

That could prompt the European Central Bank to announce at its December meeting that it will end the pandemic stimulus package in March, Allen-Reynolds said.

Central banks are forced to cope with ever higher inflation at a time of slowing economic growth, raising fears of increased risk of stagflation, a toxic combination of stubbornly high inflation and weak economic growth.
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