The German Bundesbank anticipates that the inflation rate will remain noticeably elevated into the next year. According to an analysis released on Monday, meant for the bank’s monthly report, consumer prices for gas, electricity, food, and other goods and services are expected to rise only gradually. This situation is being compounded by the fact that services have already been rising faster than average even before the war in the Middle East, and strong wage growth is currently contributing significantly to these increases.
However, the Bundesbank believes that a return to the high-inflation phase experienced in 2021/2022 is “unlikely.” This confidence stems from several factors. First, the current energy price shock, driven by the Middle East situation, is more focused on oil and refined products, while the shocks in gas and electricity, which are particularly important for Germany, have been considerably smaller so far. Second, there are no simultaneous, major shocks to food raw materials or exchange rates. Third, demand is weaker, the labor market is less tight, and the supply chain situation is more favorable. The analysis states that “under such conditions, the probability is lower that companies will adjust prices more frequently or pass on cost shocks more severely than usual.”
Nevertheless, the Bundesbank views the inflation risks as “clearly upside-facing.” Should the recent increases in energy prices continue, there is a risk that they could spill over into headline, food, and core inflation with greater intensity than previously estimated.
