Germany’s Central Bank Chief Warns Inflation Could Hit 10 Percent Amid Russia’s Gas Squeeze

President of the German Central Bank (Bundesbank) Joachim Nagel gives a press conference at the end of a meeting of finance ministers and central bankers from the Group of Seven industrialised nations (G7) in Koenigswinter, Germany on May 20, 2022. Ina Fassbender/AFP via Getty Images

Germany’s central bank chief Joachim Nagel has warned that the country’s inflation rate could surge to over 10 percent in the autumn amid an energy squeeze prompted by Russia tightening gas supplies.

Nagel made the comments in an interview with the Rheinische Post on Aug. 20, as inflation across Germany rose to a 40-year-high of 7.5 percent in July from a year ago, driven primarily by an increase in energy prices.

“The issue of inflation will not go away in 2023,” Nagel told Rheinische Post. “Supply bottlenecks and geopolitical tensions are likely to continue,” he added, noting that Russia has “drastically reduced its gas supplies” to Germany, and “natural gas and electricity prices have risen more than expected.”

“The probability is growing that inflation will be higher than previously forecast and that we will have an average of six before the decimal point next year,” he noted, pointing out that Bundesbank officials had expected inflation to be 4.5 percent for 2023 in their June projection.

“Overall, an inflation rate of 10 percent is even possible in the autumn months,” Nagel said.

Nagel’s comments come after Russian state gas giant Gazprom on Friday announced that the Nord Stream 1 pipeline would be shut down for three days of maintenance at the end of August.

The largest single pipeline carrying Russian gas to Germany, Nord Stream 1 will be closed from Aug. 31 to Sept. 2, according to the company.

In July, Gazprom restored natural gas supply through the pipeline to only a fifth of its capacity following a previous 10-day shutdown for “annual maintenance.”

Russia has in recent months cut off gas supplies to several European countries that failed to comply with President Vladimir Putin’s demand for payment in rubles.

Russia ‘Weaponizing Gas’

However, Germany which is highly dependent on Russian gas, has accused the Kremlin of weaponizing gas in response to sanctions over its invasion of Ukraine.

Russian officials have denied this and said that Russia is a reliable energy supplier and “strictly fulfills all its obligations” to Europe.

The energy squeeze has resulted in heightened prices, though, with high energy costs driving the bulk of the country’s inflation in July.

According to Germany’s Federal Statistical Office, household energy was up by an annual 42.9 percent, while heating oil was up 102.6 percent, and motor fuels up 23 percent.

In an effort to conserve energy, Germany, which has vowed to reduce its dependence on Russian energy, has begun rationing hot water, dimming its street lights, and shutting down swimming pools.

The current energy crisis in Germany is being further exacerbated by an ongoing summer heatwave that has caused the Rhine to dry up, making it harder to transport cargo and energy.

“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 Rheinische Post. “As the energy crisis deepens, a recession appears likely next winter.”