MNI: ECB May Delay Hikes, Face German Wage-Price Spiral-Grimm

Germany faces both a wage-price spiral and a squeeze on growth, a leading government policy adviser told MNI, adding that soaring raw material costs linked to the Russian invasion of Ukraine might delay European Central Bank rate rises and force a rethink of German plans to transition to a green economy.

Inflation is likely to remain at around 5% in 2022 despite rising natural gas prices being passed on to consumers only gradually, Veronika Grimm, a member of the German Council of Economic Experts, said in emailed responses to questions. At the same time, supply shortages caused by the conflict could affect production, with car and chemical output particularly hard hit.

“Gas prices are currently at a very high level, and the situation is not expected to ease in the short term,” Grimm said. “However, wholesale price increases will only gradually be passed on to consumers. After all, many have longer-term contracts.”

Spillovers from rising prices for raw materials such as fertilisers will feed through into the cost of food, she said.

“Inflation is likely to remain high this year,” said Grimm, whose research focuses on energy markets. “We should see at least a 4 before the decimal point for 2022, more likely even a 5.”

CHALLENGE FOR ECB

Grimm’s comments echoed those of Bundesbank President Joachim Nagel, who on Wednesday indicated that annual average inflation could reach 5% in Germany and remain high in the rest of Europe. Headline average euro area inflation jumped to 5.8% in February, with Nagel calling on policymakers to “keep an eye on the normalisation of our monetary policy.”

The range of possible scenarios in Ukraine makes it difficult to estimate the negative impact on industrial production, Grimm said.

However, while growth in Germany is set to deteriorate further this year, leading to a possible delay in interest rate rises, a wage-price spiral is also “likely,” putting the ECB in a difficult position, she said. Separately, officials have told MNI that the Ukraine war would end early talk of any ECB rate hikes. (See MNI SOURCES: Ukraine War To Shelve Calls For ECB Rate Hikes)

“The situation is particularly challenging since growth will probably also be dampened. So we may end up in a phase of weak growth combined with high inflation. This will possibly lead to a delay in interest rate increases by the ECB,” Grimm said.

While one way to reduce energy dependencies would be to transition to climate neutrality faster than previously envisaged, Grimm noted that higher gas prices makes it a less attractive option in the transformation of such areas as steel production.

“If energy import prices remain at higher levels in the medium term - which is likely if we diversify energy dependencies - then a lot of things will have to be rethought,” she said.