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Inflation in Germany could hit a 70-year high of 10% amid Russia's natural-gas squeeze, German central bank chief says

Markets Insider 8/22/2022 htan@insider.com (Huileng Tan)
Russian President Vladimir Putin and German Chancellor Olaf Scholz. Getty Images, Nicolas Economou/NurPhoto via Getty Images © Provided by Business Insider Russian President Vladimir Putin and German Chancellor Olaf Scholz. Getty Images, Nicolas Economou/NurPhoto via Getty Images
  • Germany's inflation rate could hit 10% this fall, the country's chief central banker told Rheinische Post.
  • The country is dealing with an energy crisis as Russian natural-gas supplies slow.
  • On Friday, Gazprom announced an unscheduled three-day shutdown of a key gas pipeline from August 31.

Germany's inflation rate could surge over 10% this fall — the highest in seven decades — on the back of the country's energy squeeze, the country's central bank chief Joachim Nagel told the Rheinische Post last week.

Nagel's comments, published on Saturday, came just after Russian state gas giant Gazprom on Friday announced an unscheduled three-day shutdown of the key Nord Stream 1 pipeline that sends natural gas to Europe. Gazprom said the pipeline needs maintenance and would be shut from August 31 to September 2.

The development sent natural gas prices higher, as Gazprom had already cut the pipeline's gas flows to just 20% of its capacity, citing technical issues. Germany — which is highly dependent on Russian gas — has accused Russia of weaponizing gas to retaliate against sanctions over the Ukraine war, and is bracing itself for a severe energy crunch this winter.

"The issue of inflation will not go away in 2023," Nagel told Rheinische Post, according to an official transcript from the German central bank. "Supply bottlenecks and geopolitical tensions are likely to continue."

Germany's economy stagnated in the second quarter of 2023, growing 0% over the first quarter, according to the country's statistics office. Meanwhile, inflation rose to a 40-year-high of 7.5% in July from a year ago, primarily due to high energy prices, according to the statistics office.

The German central bank had in June forecast 2023 inflation to reach 4.5%, but Nagel told Rheinische Post that price gains are likely to average over 6% instead.

Germany's energy crisis is compounded by an ongoing summer heatwave that has caused the Rhine to dry up, disrupting a key transportation route for energy shipping.

"If further delivery problems are added, for example due to prolonged low water levels, the economic prospects for the second half of the year would deteriorate further," Nagel told the German media outlet. "As the energy crisis deepens, a recession appears likely next winter."

German industry leaders have warned of severe economic hardship should Russian gas be cut completely. To save energy, Europe's largest economy has already started turning off some heating and lights.

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