FX.co ★ German, Belgian and Spanish inflation hits new record highs

Inflation in Germany rose in November to 6% this month, the highest since 1992. This has made it harder for the European Central Bank to convince consumers that the current surge is about to ease.

German and Spanish inflation hits record highs

Inflation rates far exceeding the ECB's 2% goal across vast parts of the region have prompted officials including President Christine Lagarde to reassure citizens that price pressures won't run out of control. A large portion, they argue, is due to temporary factors that will fade with time. Her colleague Isabel Schnabel attempted to assuage concerns in Germany this morning, explaining in a TV interview that "November will prove to be the peak."

The Bundesbank warned last week that inflation could climb to just under 6% this month, and attributed about 1 1/2 percentage points to a temporary cut in value-added tax and very low prices for travel-related services in 2020.

Carsten Brzeski, economist at ING Diba bank, called November's inflation figure "a shocker" but said the peak had yet to come. "The December inflation number could be a new record high since German reunification," he said.

While the central bank predicts price pressures will retreat in coming months, it said inflation could remain well above 3% for a longer period of time.

Price Spiral

Employees of Germany's federal states won a 2.8% raise and a tax-free one-time payment of 1,300 euros ($1,467.1) on Monday, in a deal that will ultimately cover nearly 3.5 million people. Meanwhile, Olaf Scholz's new government is planning to lift the country's minimum wage to 12 euros toward the end of next year.

Both could have consequences that might be difficult to ignore. One reason officials have been able to classify the current inflation spike as "temporary" is that secondary effects have failed to materialize so far.

Schnabel, a contender to succeed Jens Weidmann at the helm of the Bundesbank when he leaves at the end of the year, told Bloomberg last week that inflation risks are "skewed to the upside." It's a signal she might push for a faster than currently anticipated reduction in monetary stimulus when the ECB gathers in December.

The ECB's position is exacerbated by the sudden emergence of the Omicron coronavirus strain. Just as officials are trying to reassure citizens that price hikes are temporary, the possibility of new restrictions is another source of uncertainty they want to contain.

Asked about the virus's latest resurgence, Lagarde said that "we've learned a lot, we know this enemy, we know the instruments we need to use and precautions we need to take, people have been vaccinated, there are new therapies. I think we are better equipped to respond."

Both the Council of Economic Advisers and the German national tabloid Bild have issued warnings about excessively loose monetary policy.

The ECB is set to determine next month whether its pandemic bond-buying program will end in March as planned, and how an older asset-purchase plan might need to be adjusted to address lingering uncertainty. The emergence of the new Omicron coronavirus strain risks new containment measures after the Netherlands and Germany already imposed new curbs and Austria and Slovakia went into lockdown.

German bonds fell slightly, lifting the 10-year yield by four basis points to -0.30%.

Spanish price hike

Inflation in Spain accelerated in November to its highest level in almost three decades due to a serious rise in food prices. This highlights the lingering effects of supply chain bottlenecks across Europe.

According to national data released on Monday, consumer prices jumped by 5.6%. This is the highest rate since September 1992. The European Union's agreed figures were at the same level, in line with the Bloomberg survey's average forecast.

The national core inflation rate, which excludes volatile items (food and energy), jumped to 1.7%, the fastest rate since July 2013.

Spain's 10-year bonds were little changed after publication. The yield rose 2 basis points to 0.44%.

Belgium also reported strong price increases. They jumped by 5.6%.

Tomorrow the French, Italian and eurozone totals are expected to be released. The overall figure published on Tuesday is expected to be 4.5%.