German inflation hits 8.5% as food prices jump

German inflation rose to 8.5 per cent in July, driven by a surge in food prices, adding pressure on the European Central Bank to continue raising interest rates despite the mounting risk of a recession in the currency area.

While annual inflation in German food prices hit 14.8 per cent in July, up from 12.7 per cent in June, energy price inflation was 35.7 per cent, down from 38 per cent. Russia’s invasion of Ukraine and the subsequent disruption to energy supplies, as well as supply chain interruptions caused by the Covid-19 pandemic, were the underlying causes of the price pressures, said Destatis, the federal statistics agency, on Thursday.

Economists polled by Refinitiv had forecast an easing of Germany’s harmonised index of consumer price rises to 8.1 per cent, down from 8.2 per cent in June. The unexpected increase in Europe’s largest economy has shifted the focus to the eurozone, which reports fresh inflation data on Friday.

Ahead of the German figures, economists had expected the eurozone number for July, published on Friday, to remain flat at 8.6 per cent — a record high for the region’s economy. Katharina Utermöhl, an economist at Allianz, said the increase in Germany’s inflation meant the July figure for eurozone inflation could be closer to 9 per cent.

If eurozone inflation surges even higher, the ECB will come under pressure to raise interest rates by a further half point at its next monetary policy committee meeting in September. “A 50bp rate hike by the ECB [in September] looks like a done deal,” Utermöhl said on Thursday.

The ECB raised its benchmark deposit rate by 50 basis points to zero earlier this month, its first increase in more than a decade.

Carsten Brzeski, head of macro research at ING bank, said on Thursday: “We expect the ECB to continue normalising monetary policy at the end of the summer with another 50 [basis point] hike before taking a long pause.”

The first estimate of eurozone second-quarter output, also published on Friday, is expected to show weak growth in gross domestic product of 0.2 per cent. Economists fear that the second half of the year will be even worse.

“High inflation throughout the second quarter is one of the reasons why growth will be quite weak, as it has reduced households’ real incomes, which means real consumption will be weaker than it would have been,” said Andrew Kenningham, an economist at Capital Economics. “That effect is likely to continue in the second half of the year and at least the beginning of 2023, which is a key reason why we are forecasting a recession.”

After reaching a record high of 8.7 per cent in May, German consumer price inflation edged down to 8.2 per cent in June following a series of measures including the introduction of a fuel discount and a €9 monthly budget travel pass.

Inflationary pressures are likely to persist in Germany and other eurozone countries as a result of disruptions in the supply of gas from Russia. “The surge in natural gas prices may push energy inflation up again depending on how much the government intervenes to cushion households from the costs,” Kenningham said.