German Inflation

September 28, 2011

Consumer prices in Germany according to preliminary estimates advanced 0.4% seasonally adjusted in September, and the 12-month inflation rate climbed 0.2 percentage points to 2.6%, a three-year high.  Energy was responsible for somewhat over a third of all on-year inflation.  Moreover, the momentum of German inflation has been subsiding as attested by an annualized three-month increase of 1.5% this quarter following a pace of 2.6% in 2Q and 3.3% in the first quarter.  But on-year inflation is risen.  Consumer prices had climbed 1.8% in the year to September 2010 and fallen 0.3% in the prior year to September 2009.

In the 1990s, many Germans opposed plans to join a common currency area, which entailed yielding control over domestic monetary policy from the beloved Bundesbank to a regional authority, know as the European Central Bank.  There were two primary concerns.  Foremost was the possibility of a higher inflation rate which would have been the case if inflation in the ensuing regime had merely become a weighted average of previous inflation.  However, that didn’t happen.  German CPI inflation over the thirteen years between September 1998 and September 2011 averaged 1.7% per annum, roughly two-thirds as much as the 2.5% pace sustained between September 1990 and September 1998, that is the first eight years after the reunification of West and East Germany.  German inflation continues to run at or below inflation in the rest of the euro area.  In the year to August, consumer prices in the Ezone increased 2.5%, a tenth percentage point more than in Germany.

The other reservation against joining the European economic and monetary union proved extremely justifiable because of irresponsible bank lending behavior.  It was the fear that the common currency experiment would evolve into a transfer union of resources from better-managed economies like Germany to ones that spend excessively like Greece.  Rules to promote a convergence of fiscal policies were violated by many countries including Germany but especially in Greece.  If banks in Germany, France, and even the United States had exercised better judgement in accounting for the implicit sovereign risk associated with loans to Greece and to contagion affecting loans to other euro area economies sharing a tainted past, particularly after it became clear that nobody was abiding by the fiscal guidelines in the rigid spirit for which they were supposed to apply, the economies of Euroland and the world would not be so threatened now.  This is the second time in less than five years that reckless behavior by large banks is exerting an enormous cost on everyone else.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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