German inflation roars back and hits 11-month high in Jan By Reuters

© Reuters. FILE PHOTO: The spread of the coronavirus disease (COVID-19) in Germany

BERLIN (Reuters) – German annual consumer prices turned positive and rose by far more than expected in January, the Federal Statistics Office said on Thursday, attributing a rise in sales tax and the minimum wage as factors behind the increase.

Consumer prices, harmonised to make them comparable with inflation data from other European Union countries, rose by 1.6% year-on-year after declining by 0.7% in December.

January’s reading was the highest since 1.7% last February, the Statistics Office told Reuters. It compared with a Reuters forecast for a rise of 0.5%.

“In addition to the changes in VAT rates, the development of consumer prices may also be influenced by other factors such as the CO2 price and the increase in the statutory minimum wage from January 2021,” the Statistics Office said in a statement.

The European Central Bank targets an inflation rate of below but close to 2% across the euro zone. Annual inflation for the euro area stood at -0.3% last month.

ING economist Carsten Brzeski said the surge was mainly the result of the reversal of last year’s VAT reduction, higher energy prices and a new carbon tax.

But, in a note headlined “Germany: inflation shock”, he added: “Today’s inflation number is just the beginning of a period of significantly higher headline inflation in Germany … With price mark ups in some sectors once the economy starts to reopen again, headline inflation in Germany could be pushed above 2% after the summer.”

Klaas Knot, a member of the ECB’s Governing Council, said on Wednesday he was “cautiously optimistic” about Europe’s economy recovering during 2021, as the rollout of COVID-19 vaccines should give more room for growth in the second half of the year.

Interest rates in the euro zone will remain low in the foreseeable future, he added, as relatively low production will limit inflation.

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