Higher inflation in Germany is a healthy sign its prices are "normalising" after years of lagging the euro zone, the head of the Ifo research institute said, confirming he sees the country's economy growing 2.4 per cent this year.
In an interview today, Hans-Werner Sinn said the pick-up in consumer inflation - which rose to an annual 2 per cent last month - showed Europe's largest economy was experiencing a long overdue investment-driven boom.
Some economists fear demands for bigger wage hikes in the light of the country's robust economic recovery will lead to a wage-price spiral. Volkswagen and German unions agreed to a hike of 3.2 per cent last week, which raises the prospect of other sectors gaining similar inflation-busting increases this year.
Evidence of increased pipeline pressures on consumer inflation came earlier today with data showing German producer prices rose 5.7 per cent on the year in January, their strongest rise since October 2008.
But Mr Sinn said the current outlook for inflation was healthy and reflected the fact investors no longer wanted to take their capital outside Germany, which is experiencing a faster than expected recovery.
"We have an investment-driven boom which we haven't had for the last 10 to 15 years - actually we were the laggard of Europe in terms of growth," Mr Sinn said.
Ifo will release its closely-watched business climate index on Monday, which is expected to stay largely steady.
Business morale rose to its highest level in 20 years in January, surging past economists' forecasts on the back of a manufacturing sector now fully recovered from the 2008 financial crisis.
January's pick-up in German inflation also suggested consumer prices in the wider euro zone are rising fast enough to put pressure for a possible policy tightening on the European Central Bank (ECB), which targets inflation of close to but just below 2 per cent.
Mr Sinn said the ECB should not change interest rates "for the time being as many European countries are still in deep (financial) trouble.
"Those countries which had soft budget constraints and absorbed a lot of capital in the last 10 years are now suffering from the crisis because the capital is not coming anymore," he said.
European Union leaders hope to agree a comprehensive package of measures at a summit on March 24-25th to draw a line under the euro zone's year-old sovereign debt crisis.
"The interest convergence which the euro brought had shifted too much capital in the south western periphery of Europe - at the expense of Germany, which ... had the lowest investment rate among all OECD countries," said Mr Sinn. "These things need to be normalised."
On the agenda for inclusion in the package are changes to the current euro zone rescue fund, a new rescue facility from 2013, and reforms to boost euro zone competitiveness.
The banking sector needed to participate in and share the investment risk involved in the new rescue fund, he added.
Reuters
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