German September Inflation Accelerated to Fastest in Three Years

Inflation in Germany, Europe’s biggest economy, accelerated more than economists forecast in September to the fastest pace in three years.

The inflation rate, calculated using a harmonized European Union method, increased to 2.8 percent from 2.5 percent in August, the Federal Statistics Office in Wiesbaden said today. That’s the highest since September 2008. Economists predicted the rate would rise to 2.6 percent, according to the median of 20 estimates in a Bloomberg News survey. Prices advanced 0.1 percent in the month.

European Central Bank officials have signaled they will defy calls for lower interest rates next month amid a sovereign debt crisis that’s threatening to push the 17-nation euro region into recession. Inflation “is likely to stay above” the ECB’s 2 percent limit for the remainder of the year, the Frankfurt-based central bank said in its monthly report on Sept. 15.

“Given an environment of accelerating price pressure it’s psychologically pretty difficult for the ECB to lower interest rates even though the bank has some room left to act,” said Stephan Rieke, an economist at BHF Bank in Frankfurt. “However, inflation risks are clearly tilted to the downside and the rate may fall toward the ECB’s ceiling by year-end.”

The statistics office said the main inflation drivers in September were higher prices for mineral oil products as well as clothing and shoes. The state of Saxony said today that heating oil costs jumped 4.4 percent from August and clothing and shoes were 9.2 percent more expensive.

Non-Harmonized Inflation

On a non-harmonized basis, German inflation accelerated to 2.6 percent in September, also the fastest in three years, from 2.4 percent last month. Economists forecast it would hold steady.

The ECB raised borrowing costs twice this year, bringing the benchmark rate to 1.5 percent, to curb inflation even as the debt crisis worsened. Economists at JPMorgan Chase & Co., Royal Bank of Scotland Group Plc and Barclays Capital forecast policy makers may reverse those rate increases at their Oct. 6 meeting.

With money markets tightening, officials have indicated the ECB is more likely to take non-standard measures first before resorting to rate cuts. Council members Ewald Nowotny and Luc Coene signaled the ECB may offer banks unlimited liquidity for as long as a year, while a euro-area central banking official speaking on condition of anonymity said policy makers will also debate restarting their covered-bond purchases.

‘Still Pretty High’

“The ECB is in a position to help, not so much on interest rates as in terms of market interventions,” said Laurent Bilke, global head of inflation strategy at Nomura International Plc in London. “Inflation is still pretty high and will stay high until the end of the year before slowing down in 2012.”

Euro-region inflation probably held at 2.5 percent in September, a Bloomberg survey shows. Eurostat, the European Union’s statistics office in Luxembourg, is scheduled to release that data on Sept. 30.

Raising rates was “justified” on the back of inflationary pressure and the economic recovery, ECB Executive Board member Lorenzo Bini Smaghi told Markit Magazine in an interview published yesterday. At the same time, “we never said that we were starting a series of interest-rate hikes.”

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