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German inflation accelerated in January after tax increase

German inflation accelerated in January after the government raised a sales tax on goods ranging from clothes to furniture and cars.

Consumer prices rose 1.8% from a year earlier after increasing 1.4% in December, when measured using a harmonized European Union method, the Federal Statistics Office in Wiesbaden said today. The report confirmed an initial estimate reported by the office on January 30. In the month, prices fell 0.2%. The German economy, Europe's largest, may rebound from an increase in the value-added tax to 19% from 16% on January 1 as lower energy costs and declining unemployment support household spending and exports continue to grow.
The European Central Bank has already signaled it's ready to raise its main lending rate further next month to keep inflation in check. „The inflation increase in January was certainly partly due to the VAT increase but it wasn't the full impact,” said Rainer Guntermann, an economist at Dresdner Kleinwort in Frankfurt. „Inflation will probably accelerate further in coming months.” Non-harmonized inflation rose 1.6% in January after a 1.4% gain in the previous month, today's report showed.
Food prices rose 2.6% in the year while clothing and shoes were 1.2% more expensive, the statistics office said. While the effect of the VAT increase was „hardly apparent” in the January data, the statistics office estimated it could add up to 1.4 percentage points to the inflation rate. The VAT increase may not have been „fully reflected” in January price gains, the ECB said in its monthly bulletin published yesterday.

Heating oil costs dropped 5.3% in the month, today's report showed. While a 26% retreat in oil prices from a record $78.40 a barrel in July has helped contain inflation, it's also bolstering expansion by leaving consumers with more money to spend. The German economy unexpectedly gathered speed in the Q4, expanding 0.9% from the previous three months, when it grew 0.8%. In the economy of the 13 nations sharing the euro, growth was also stronger than expected in that period.
Germany recorded economic growth of 2.7% in 2006, the most in six years. Its economy may expand 2.3% this year, the DIHK chamber of industry and trade forecast February 14. German unemployment dropped to 9.5% in January, a five-year low. The ECB is concerned that faster growth and rising employment may fuel inflation by giving labor unions room to push for higher wages. ECB council member Vitor Constancio told reporters yesterday that the outcome of salary negotiations are among the „most immediate risks” to inflation.

Some labor unions have already used stronger growth to step up their wage demands. IG Metall, Germany's largest union, wants 6.5% more pay for workers at companies including Siemens AG and DaimlerChrysler AG, up from a 5% request in 2006. While euro-region inflation may slow to about 2% in 2007 from 2.2% in 2006, according to the ECB's December forecasts, price increases may start to accelerate again in the H2 of this year, the bank said in its monthly report yesterday.
ECB President Jean-Claude Trichet on February 8 stepped up his inflation-fighting rhetoric when calling for „strong vigilance,” signaling the bank will raise borrowing costs further next month. The Frankfurt-based bank has increased its main lending rate six times to 3.5% in the year through December 2006. „For inflation risks to remain contained, the ECB needs to maintain its hawkish stance,” Dresdner Kleinwort's Guntermann said. „They'll raise the key rate to 4% by the end of the year but that doesn't need to be the end of it.” The ECB's 19-member rate-setting governing council is scheduled to publish its next monetary policy assessment on March 8. (Bloomberg)