BERLIN, (Reuters) – The German government anticipates that consumer price inflation will rise more this year than previously projected, according to the economic ministry’s annual economic report released Wednesday. This would likely result in higher wage demands from labour unions.

According to the ministry, the government expects that there will be a 3.3% national inflation rate in 2022. This is after the 3.1% recorded in 2021. Higher energy prices and scarcity of intermediate products will continue pushing up overall prices.

It stated that the federal government was closely watching the evolution of inflation and key drivers of prices, particularly those related to energy markets or supply chain disruptions.

Robert Habeck, the Economy Minister, presented the report to reporters. He stated that Berlin expects inflation to fall next year in line with the European Central Bank’s target for price stability of around 2.2%.

To alleviate the strain of rising energy costs on households, the government is looking into scrapping a surcharge on electricity bills https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwiJ2-T3yM_1AhWOlP0HHXQLAC8QFnoECAIQAQ&url=https%3A%2F%2Fwww.reuters.com%2Fworld%2Feurope%2Fgermany-mulls-scrapping-energy-bill-surcharge-early-prices-rise-2022-01-22%2F&usg=AOvVaw3umzBH3pGGyWaXo8H3zeIa used to support renewable power already this year – earlier than initially planned, Habeck added.

In addition, the government cut its forecast of economic growth for 2022 from 4.1% to 3.6% in October. It pointed out headwinds to the economy during the first quarter as a result new restrictions in coronavirus panademic.

As infection numbers fall in spring, authorities will be able to lift restriction on tourism and retail. The government believes that this will accelerate the recovery process.

According to the ministry, “The industry should be also able expand its production significantly again once the supply problem gradually clears over the course of the calendar year.”

The economic recovery and higher inflation will likely lead to “somewhat stronger wage growth” in 2022 after negotiated wage agreements last year https://www.reuters.com/markets/europe/german-wages-barely-grew-2021-despite-skyrocketing-inflation-2021-12-16 turned out to be very moderate due to the economic slump in the pandemic, the ministry said.

Unions won’t push for excessive wage demands, which would be higher than those seen prior to the pandemic. However, the ministry added: “There are no signs currently of a wages price spiral.”

The central bankers closely monitor wage trends in Germany and the euro area, which is its largest economy. These central bankers monitor wage developments in Germany and the euro zone very closely to see if rising consumer prices can lead to higher wages. This could signal the start of an inflation spiral that will lead to higher inflation both short-term and long-term.