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German inflation edges up to 3.9% in August

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Shoppers wear mask and fill Cologne’s main shopping street Hohe Strasse (High Street) in Cologne, Germany, 12, December, 2020. REUTERS/Wolfgang Rattay/File Photo

German consumer price inflation remained at euro-era high levels in August, preliminary data showed Thursday, climbing slightly to 3.9 percent on the back of one-off effects related to the coronavirus pandemic.

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The end of VAT holiday introduced by the German government to mitigate the impact of pandemic lockdowns on the economy and the rise in the price of oil explained some of the increase, according to federal statistics agency Destatis.

The August 12-month inflation figure was 0.1 percentage point higher than in the previous month, and the highest value in Europe’s top economy since December 1993, when it came in at 4.3 percent.

“The current increase is likely to remain temporary,” said Christine Volk, chief economist at public lender KfW.

A return to inflation under the European Central Bank’s (ECB) two-percent target was likely, she said, but warned that persistent shortages in key components, such as computer chips, could “impact on consumers’ wallets, as companies are likely to pass on the higher costs at least partially”.

The ECB recently raised its inflation target to two percent, and said it would tolerate temporary over-or undershooting of the target before stepping in.

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Policymakers at the Frankfurt institution will meet next week to discuss their next moves.

While interest rates are set to remain at historic lows, high German inflation will fan debate about when the ECB should start removing some of its vast stimulus for the euro region. Germany is traditionally wary of inflation for historical reasons.

Extreme hyper-inflation in the early 1920s devastated the economy and fuelled political instability in the fledgling Weimar Republic which preceded Nazi rule.

Germany has been among the loudest critics of the ECB’s ultra-loose monetary policy.

In a note published last week, the German central bank, the Bundesbank, said inflation could remain above 2 percent “until mid-2022”.

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