German inflation surges to two-year high of 1.9pc
Rising costs benefit Ireland but ECB faces interest-rate pressure
INFLATION in Germany rose faster than expected this month to the highest level since October 2008. The news could be good for Ireland if costs in Europe's biggest economy rise while costs are falling here.
German inflation rate, calculated using a harmonised European method, increased to 1.9pc from 1.6pc in November, according to the country's Federal Statistics Office.
News of higher-than-expected growth in Germany adds to the sense of an increasingly two-tier eurozone, with Germany and other core economies powering ahead while Ireland and the rest of the periphery flounder.
However, economist Austin Hughes of KBC Bank said the news could be good for Ireland.
"The reflex reaction of the European Central Bank (ECB) is probably to see this as a bad thing, but if German inflation outpaces inflation in Ireland we should benefit because I would expect to see a divergence in prices between the two," he told the Irish Independent.
In that view, rising inflation will increase the cost of doing business in Germany and make Ireland, and other non-core eurozone economies relatively more competitive.
The German central bank estimates that the German economy grew 3.6pc in 2010 -- the most in two decades.
Ireland is only likely to reap such benefits if the ECB leaves interest rates unchanged, even if inflation in Germany rises further.
The widening divergence within the 16-nation Eurozone will make it harder for the ECB to determine a rate appropriate across the zone. Across Europe, inflation held steady at 1.9pc in November, in line with the ECB's price-stability definition of just below 2pc.
The ECB has left its key interest rate at a record low of 1pc since May 2009.
Economists do not expect rates to be increased over the next half-year at least, but if Germany continues to outperform it will increase pressure to raise rates above the current historic lows. In contrast, the US Federal Reserve is not expected to increase rates until at least 2012.
The German inflation figure surprised economists who had expected the rate to be unchanged from November, according to a Bloomberg News survey.
However, some economists said the faster-than-expected increase might be due to seasonal factors -- not least Christmas spending.
German inflation averaged 1.2pc in 2010, the German statistics office said.
In sharp contrast to the Irish experience, German consumer confidence is now close to the highest level in more than three years.
A fall in unemployment has boosted households' willingness to spend, according to market research company GfK.
Retail sales rose the most in almost three years in October and business confidence surged to a record high in December.
The rising cost of food has had a significant impact on the figures.
In the German state of North Rhine-Westphalia, food prices rose 1.2pc in the month and 3.8pc this year, a report from the state's statistics office showed earlier today.
After Europe battled the big chill heating oil is now 5.6pc more expensive than a month ago and 28.7pc more expensive than in December last year.