Underlying inflation may have peaked but prices pressures are easing too slowly and there is a growing risk that consumer price growth gets stuck above 2%, the Bundesbank said today in a monthly economic report.
Central banks have been fighting inflation for the past two years and rapid rate hikes appear to be working their way through the economy.
But there are ample concerns that the final stage of cutting price growth, from 3% to 2%, may be more difficult than now anticipated.
"The impression took hold that inflation rates will nonetheless persist for longer above the rates targeted by central banks," the Bundesbank said.
"In particular, the ongoing high wage pressures could make it harder to press ahead with curbing inflation," it added.
The European Central Bank has lifted rates from deep in negative territory to 3.75% in just a year - the fastest pace on record - but monetary tightening is nearing its end now and policymakers are debating whether one last rate hike is needed.
A potential problem is that given high inflation and a tight labour market, the ECB's 2% target is not the sort of anchor in wage negotiations as in the past, the Bundesbank said.
A survey of experts taking part in German wage negotiations concluded that the ECB's 2% inflation target no longer played any role in the wage agreements at the turn of this year and the target has lost importance during the talks.
"If unions' inflation expectations stay above the 2% target for a long time, this would be worrying from a monetary policy point of view," the Bundesbank said.
"This would increase the risk that the high inflation rates would become more entrenched than previously assumed," the German central bank stated.
Another issue is that the drop in commodity prices appears to have stopped and some prices have even increased, suggesting that disinflation may not get much more relief from lower energy prices.
On the prospects of the German economy, the Bundesbank said that economic output will be largely flat in the third quarter but private consumption should recover, even if industrial output is likely to remain weak.
