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July 22, 2021
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Germany has weathered the COVID-19 crisis better than most other EMU partners. With a much smaller output gap and additional headwinds from several structural trends it is more prone to experience higher inflation, in fact, it already has. Given that the ECB will aim its policy towards the EMU average inflation, German inflation could exceed the 2% mark for several years, without triggering an ECB policy response. The ECB's new strategy with the increased 2% symmetric inflation target - implying the acceptance of inflation overshoots - and its announced preparedness to wait until it is fully convinced that its policy has worked before adjusting its policy, make such a scenario even more likely. [more]
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