German inflation a problem for ECB

INCREASING inflation in Germany fuelled by cheap ECB money is creating a problem for the bank, which meets today in Helsinki.

The ECB increased its rate for the first time in almost two years in April and as inflation continues to rise it is expected to at least signal a second increase in June, if not sooner.

But Germany’s exceptionally strong growth combined with the low ECB interest rate is creating problems for its economy similar to those experienced by Ireland in the past.

The IMF has warned that inflation could reach 4% a year as a result of its strengthening economy on foot of industrial output increasing by about 14% a year — similar to China’s.

German media is reporting that people are spending on property from houses to land and on other assets with prices increasing dramatically for the first time in decades.

The normal response would be to increase interest rates — something that did not happen when inflation and borrowing spiralled in Ireland creating the boom. But with Ireland and the other peripheral eurozone countries struggling with recession, the last thing they need is higher borrowing costs.

Eurozone inflation increased again in April to 2.8% — well above the 2% target set by the ECB, and is likely to encourage them to increase interest rates for the second time having added 0.25% in April.

Rising inflation has affected spending by German consumers who cut back on buying in March according to the latest Eurostat figures, which is bad for the recovery of the rest of the eurozone.

Ireland bucked the general EU trend with consumer spending increasing in March.

The biggest spending collapse was in Portugal with people anticipating the austerity measures associated with the bailout, followed by Spain, where unemployment has reached 20%.


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