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Inflation-averse Germans see fastest price rises in 4-1/2 years

By Michael Nienaber

BERLIN (Reuters) - German inflation, a politically- and emotionally-charged issue for consumers heading for the polls later this year, soared to its highest level in four-and-a-half years in February, bounding past the European Central Bank's euro zone target.

Manufacturing was also reported as growing at the strongest rate since 2011, in a further sign that Europe's biggest economy is firing on all cylinders.

The inflation data nonetheless triggered fresh calls from Germany for an end to the ECB's loose monetary policy, particularly with the federal election set for September.

Inflation is a red flag for many Germans whose families suffered from depreciation of money and mass unemployment in the 1920s. Coupled with the ECB's zero interest rates, inflation is also undermining already meager returns from savings accounts.

"It's high time for the ECB to move away from its ultra-loose monetary policy," Bavarian Finance Minister Markus Soeder told Frankfurter Allgemeine Zeitung (FAZ) newspaper.

With overall savings of 5 trillion euros ($5.28 trillion)and interest rates at zero, an inflation of two percent means German savers are basically losing 100 billion euros per year, he added.

Consumer prices, harmonized to compare with other European countries, rose by 2.2 percent on the year after an increase of 1.9 percent in January, the Federal Statistics Office said.

That was the highest annual inflation rate since August 2012 and came in slightly stronger than a Reuters consensus forecast of 2.1 percent. The ECB targets a rate of below but close to 2 percent for the 19-member euro zone as a whole.

Rising energy prices and higher food costs were the main drivers behind the overall increase in Germany, a breakdown of the non-harmonized data showed.

"That's not just a flash in the pan. Inflation will remain this high in the coming months," Postbank chief economist Marco Bargel said, adding that core inflation would also pick up due to Germany's continued upswing and its robust labor market.

German unemployment fell more than expected in February and the jobless rate remained unchanged at its lowest level since reunification in 1990, separate data from the Federal Labour Office showed on Wednesday.

STRENGTH

The strong economy enables companies to pass on higher costs - such as increased import prices - to customers, pushing up overall inflation.

This trend was also reflected in a survey among purchasing managers, also released on Wednesday. It showed output prices charged by manufacturers rose at the fastest pace since 2011.

The goods-producing sector expanded at its strongest rate in nearly six years in February, suggesting factories will push up overall growth at the start of 2017.

"The rising inflation in Germany supports the notion that preparations should start for an exit from the expansive monetary policy in Europe," Ifo institute head Clemens Fuest told FAZ newspaper.

"If these figures are confirmed for the euro zone as a whole, the ECB should reduce its bond purchases by 10 billion euros a month from April", Fuest suggested.

But other leading economists jumped to the defense of the ECB, saying it was too early for the central bank to reverse course.

"Calls from Germany on the ECB to change its monetary policy are mistaken and premature," the head of the DIW economic research institute Marcel Fratzscher said.

The inflation rate for the entire euro zone is expected to rise to 2.0 percent in February from 1.8 percent in January, economists polled by Reuters said. Those figures are due on Thursday.

The ECB has slashed interest rates and adopted a bond-buying program worth 2.3 trillion euros to pump money into the region's economy. It has rejected German calls to scale back its stimulus, arguing that core inflation is still too weak.

A sustained rebound in German inflation would give Bundesbank President and ECB rate-setter Jens Weidmann more grounds to argue for a reduction in the ECB's bond-buying program, a scheme that he has often criticized.

The German central bank has warned that homes in large German cities are 15 to 30 percent overpriced, stoking fears about the side-effects of the ECB's stimulus.

The German economy grew by 1.9 percent last year, driven by strong private consumption, increased state spending and higher construction investment, and it is expected to carry its growth momentum through into 2017.

Markit economist Trevor Balchin said he expected Germany's quarterly growth rate to accelerate to at least 0.6 percent in the first three months of 2017 from 0.4 percent in the final three months of 2016.

($1 = 0.9472 euros)

(Additional reporting by Joseph Nasr and Rene Wagner; Editing by Jeremy Gaunt)