Feb. 15 (Bloomberg) -- Bettina Georg used to go shopping without looking at prices. Now, with German inflation at a 12- year high, she comparison-shops and looks out for discounts.

``Groceries, fuel, newspapers, everyday goods have become shockingly more expensive,'' said the 43-year-old mother of one in Frankfurt. ``Average households have to reach deeper and deeper in their pockets. It almost triggers existential fears.''

Her fears may get worse.

German labor unions are pushing for what the chairman of one of them, IG Metall's Berthold Huber, calls ``a mega wage year.'' A jump in pay would add to inflation concerns and raise costs at companies just as the global economic slowdown threatens export-driven growth. It might also weaken the case for any interest-rate cuts by the European Central Bank, which has kept borrowing costs at a six-year high.

``Inflation has prompted consumers to hold back on spending,'' said Joerg Kraemer, chief economist at Commerzbank AG in Frankfurt. ``In the current environment, wage increases can easily backfire.''

Chancellor Angela Merkel's Christian Democrats already have ceded ground on minimum wages, and the prospect of national elections in 2009 may reduce her party's ability to stand firm. Her coalition partner, Social Democratic Party leader Kurt Beck, has called for workers to enjoy ``social justice,'' and public- worker unions yesterday began token strikes to bolster wage demands.

Europe's Motor

A slowdown in Germany would drag down the economy of the 15 nations sharing the euro. The country accounts for about a third of the region's gross domestic product, and German exports and investment have spurred growth in the past two years.

Consumer confidence stayed close to a two-year low last month on concern income would be eaten up by rising food and fuel prices. Inflation held at or above 3 percent for a third month in January. The ECB aims to keep annual consumer-price gains just below 2 percent.

In Germany more than elsewhere, consumers pull back if they see rising prices, said Gilles Moec, an economist at Bank of America in London.

So-called hyperinflation gripped the country in the 1920s after the government printed banknotes to fund reparation payments to the Allies following World War I. By the end of 1923, prices were doubling every 49 hours, paving the way for an economic slump and Adolf Hitler's subsequent rise to power.

Creating the Bundesbank

To ensure hyperinflation never returned, the German government created the Bundesbank in 1957. More than five decades later, the German central bank's inflation-fighting focus remains at the heart of European monetary policy even the nation ceded control of borrowing costs to the ECB in 1999.

While weaker growth prospects prompted ECB President Jean- Claude Trichet on Feb. 7 to step back from a threat to raise interest rates, he said the bank remains ``committed'' to keeping companies from raising prices and wages.

``The higher the first important wage settlements are at the beginning of the year, the more reluctant the ECB will be to lower interest rates,'' said Alexander Koch, an economist at UniCredit Markets and Investment Banking in Munich.

The Bundesbank says it expects wage pressures to increase ``step by step'' this year, with labor costs rising 0.9 percent, the biggest jump in 13 years, after gaining 0.3 percent in 2007. That and declining unemployment will help boost household spending by 1.6 percent, the most since 2001, the bank says.

`Still Optimistic'

``I may be the last one, but I'm still optimistic on consumer spending,'' said Stefan Bielmeier, an economist at Deutsche Bank AG in Frankfurt. ``Households will realize that their financial situation is gradually improving.''

Labor unions are determined to use the lowest unemployment rate in 15 years, 8.1 percent, to compensate workers for rising prices. Wages grew more slowly than consumer prices in the past four years, according to the DGB union federation.

``Unions have become noticeably more militant,'' said Dario Perkins, an economist at ABN Amro Holding NV in London. `With inflation already well above the ECB's objective, there is clearly no room to accommodate such a trend.''

Retail sales fell for a fourth month in January, the Bloomberg Purchasing Managers Index showed. Consumer spending has lagged behind the euro-region average since 1996 and contributed little or nothing to economic expansion in the past six years, shaving 0.2 percentage points off growth in 2007.

Lower Growth

The German government on Jan. 23 lowered its 2008 growth forecast for the third time in less than a year, to 1.7 percent from 2 percent. Economy Minister Michael Glos said the revision amounted to an appeal to avoid excessive wage accords.

Deutsche Bahn AG, Germany's state-controlled railway, agreed Jan. 13 to raise wages by 11 percent through September. The GDL train drivers' union had demanded as much as 15 percent more pay. Ver.di, Germany's second-largest labor union, wants 8 percent more pay for about 1.3 million workers on federal and local government payrolls, its biggest wage demand since 1992.

German public-sector unions on Jan. 25 rejected a 5 percent pay-increase offer as a ``provocation.'' Frank Stoehr, chief negotiator for the DBB civil servants' union, said it ``amounts to less than nothing.''

Georg, who works as a taxi driver, isn't counting on her purchasing power increasing any time soon.

``Of course, I'm hoping that prices will slightly go down again, but I don't believe it,'' she said. ``I fear that prices will continue to rise in the future.''

To contact the reporter on this story: Simone Meier in Frankfurt at smeier@bloomberg.net

Last Updated: February 14, 2008 18:07 EST