Energy and food prices pose inflation risks for Germany in coming months, but the economy's underlying trend remains positive, Germany's central bank said on Monday. The country's Economy Ministry also warned that troubles in the US economy, the global credit crisis, the strong euro and high oil prices were dampening German growth.
"The latest price developments have been increasingly influenced by foreign factors. Alongside higher crude oil prices, rising food prices have contributed to the trend," the Bundesbank said in its monthly report.
"In the coming months, further strong rises in consumer prices are to be expected," it added, saying a "normalisation" of prices was unlikely before the spring of 2008. The Bundesbank said growth risks had risen during the summer, including inflation, which was weighing on the budgets and income expectations of private households, and volatility in global financial markets.
It described recent movements in exchange rates, which have pushed the euro to record highs against the dollar, as having an "ambivalent character" from a German perspective. "On the one hand they are contributing to an easing of price conditions and acting as a counterweight to the worsening of the terms of trade through oil prices," the Bundesbank said. "On the other hand, they are linked to weaker profit margins and sales prospects abroad. The positive underlying economic trend is, however, not in question."
Bundesbank Vice President Franz-Christoph Zeitler said on Monday that further specific problems with individual assets could yet emerge from the credit crisis, but the flow of information had moved from bad news to mixed signals.