German Inflation Worst in 15 Years, Wages Decline

German inflation picked up speed in June, jumping to an annual 3.3 percent, the fastest pace since 1993, from 3.0 percent in May, official figures showed Friday.

As inflation climbs and indicators point to an economic slowdown, there are growing concerns Germany and the 15-nation euro zone overall will stumble into 'stagflation' - a fatal combination of little growth and rising prices. Central banks would normally cut interest rates to boost a slowing economy but if inflation rises, driven by soaring oil prices, they have no option but to hike borrowing rates so as to keep living costs in check.

"Consumer price inflation continues to be a serious problem for the German economy in 2008," commented Martin Lueck at the Swiss bank UBS. "It has already dampened the chances of a recovery in private consumption quite markedly, as inflation is eroding disposable income and offsetting the positive impact from higher wages."

While energy costs rose sharply, Capital Economics economist Jennifer McKeown noted that "the patchy detail from the (German) states suggests that food inflation was broadly stable, or perhaps even softened a little in June."

Unfortunately, she added, the "data suggest that eurozone inflation might have risen to another high of 3.9 percent in June," sealing the case for an interest rate hike next week by the European Central Bank.

Euro-zone inflation spiked to a record 3.7 percent in May.

In Germany, "it is not a surprise at all that the key driver of the latest increase was once again the oil price," said Alexander Koch at UniCredit Markets. The cost of heating oil jumped a massive 60 percent and "together with rising natural gas prices, this heralds a marked rise in heating expenditures during the coming winter," Koch forecast.

He nonetheless felt that weaker German economic data "and especially depressed consumer spending should limit the pricing power of companies and thus help to keep non-energy inflation at an acceptable level" in coming months.