Germany is the central and largest economy within the European Union; it is also the most influential for anything related to the response from the European Central Bank and EU Central Bank President Christine Lagarde.   Today, Germany is reporting a massive (unexpected) jump in overall inflation for May of 8.7%, up from the previous month’s 7.8%.

Ironically, it was a little more than a month ago when EU Central Bank President Christine Lagarde said she did not expect the EU inflation to be quite as bad as the U.S. inflation crisis due to the EU spending less on COVID relief and focusing on employment retention.  This was the ECB justification for not raising interest rates until later this summer.  Obviously Lagarde has joined Jerome Powell in the room filled with bad financial decisionmakers.

Germany is the largest and most influential economy inside the EU. If the German economy falters, the entire EU slips into a recession.  The massive inflation now being reported by Germany, that continues climbing each month, will increase the urgency for of Lagarde to raise rates.  They too are in the inflation spiral, and this issue will quickly fracture the EU response to Ukraine.

(Via Reuters) – […]  German consumer prices, harmonised to make them comparable with inflation data across the European Union, increased to 8.7% from 7.8% a month earlier, well ahead of expectations for 8%, data from the Federal Statistics Office showed on Monday.

Inflation was last time this high in the winter of 1973/1974, when the first oil crisis led to a new and difficult-to-tame inflationary cycle.

Although the ECB responded to soaring prices relatively late compared to its global peers, the bank made clear last week that interest rates must go up to stop high inflation from getting entrenched.

While ECB chief Christine Lagarde and chief economist Philip Lane made the case for gradual, 25 basis point hikes in July and September in the minus 0.5% deposit rate, economist said a bigger, 50 basis point increase is very much a possibility.

“The ECB has clearly passed the stage of discussing whether and even when policy rates should be increased,” ING Economist Carsten Brzeski said. “The only discussion seems to be on whether the ECB should start with a 25bp rate hike in July or 50bp.” (read more

Oh, what a difference a month makes.  Interview April 24, 2022.

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