Sharp increases in prices at the end of 2007 must not be allowed to drive inflationary pay increases in Europe, the German central bank warned Saturday, after inflation data showed prices rising more steeply than in a decade.
"The current, exceptionally high, rates of inflation in Germany and in the eurozone as a whole should not be allowed to serve as a benchmark in the coming round of pay negotiations," Bundesbank President Axel Weber said.
"Upward pressure on prices, caused by exaggerated pay deals can endanger price stability in the medium term," Weber wrote in an article to be published in the Sunday edition of the mass-circulation Bild newspaper.
The Governing Council of the European Central Bank (ECB) would act decisively against inflation, said Weber, himself a member of the council. "Money is important for our economy and our society," he said.
Weber said the Bundesbank was watching the current price rises "with concern," although he predicted the rate of inflation could ease in the second half of 2008.
German price data published Friday put average inflation over 2007 as a whole at 2.2 per cent, the highest level since 1994. Preliminary December inflation came in at 2.8 per cent, driven largely by energy and food costs.
The Bundesbank was predicting that prices could rise by 2.3 per cent over 2008, well above the ECB target of 2.0 per cent, provided that wage increases were kept in check, Weber said.
He was writing amid universal predictions from German economic institutes and the government that economic growth would slow sharply in the year ahead. The Bundesbank is predicting growth of 1.9 per cent for 2008, well down from above 2.5 per cent recorded this year.
Unemployment predictions remain favourable, however, with analysts forecasting a fall from the current seasonally adjusted level of 3.6 million.
GERMAN UPTURN SLOWING ONLY SLIGHTLY:
The DIW economic research institute expects German economic growth to slow only slightly in 2008 and forecast it will expand by more than 2 percent, the head of economic research was quoted as saying on Saturday.
In an advance of a text to appear in the Tagesspiegel am Sonntag newspaper on Sunday, Berlin-based DIW's Christian Dreger said that gross domestic product (GDP) in Europe's largest economy would show growth "slightly above 2 percent" next year.
"We're expecting a continuation of the upturn at a relatively high level," he said, adding more people would feel the upturn next year than in 2007. Several other economic institutes have recently cut their 2008 growth forecasts to under 2 percent.
Dreger also said he expects the unemployment level to fall below three million at least for part of next year. He also expects the inflation rate in 2008 to fall under 2 percent after averaging 2.2 percent in 2007.
Earlier in the week, Economy Minister Michael Glos said the government will again lower its 2008 growth forecast after already cutting the target in October. "We'll have to slightly reduce our growth forecast for 2008," Glos told Die Zeit newspaper.
The government lowered its official forecast for 2008 in October to 2.0 percent from 2.4 percent previously.
Glos did not specify a new forecast for 2008. Earlier in December, two leading German economic think tanks cut their forecasts for Europe's largest economy next year, saying weaker investment and a US slowdown would crimp growth.
The Ifo research institute forecast growth of 1.8 percent next year, trimming predictions it made jointly with other think tanks in October for growth of 2.2 percent in 2008. The Kiel-based Institute for World Economy (IfW) pared its 2008 forecast to 1.9 percent from 2.4.