Germany faces inflation pressures over the coming months because of higher energy and food prices, but the economy's underlying positive trend remains intact, the Bundesbank said today.
"The latest price developments have been increasingly influenced by foreign factors. Alongside higher crude oil prices, rising food prices have contributed to the trend," the Bundesbank said in its monthly report.
"In the coming months, further strong rises in consumer prices are to be expected," it added, saying a "normalisation" of prices was unlikely before the spring of 2008.
The Bundesbank said growth risks had risen during the summer, with the rising inflation rate weighing on the budgets and income expectations of private households and financial market turbulence also playing a role.
It described recent movements in exchange rates, which have pushed the euro to record highs against the dollar, as having an "ambivalent character" from a German perspective.
"On the one hand they are contributing to an easing of price conditions and acting as a counterweight to the worsening of the terms of trade through oil prices," the Bundesbank said.
"On the other hand, they are linked to weaker profit margins and sales prospects abroad. The positive underlying economic trend is, however, not in question."
In its report, the Bundesbank also criticised recent government plans to extend jobless benefits to older people as counterproductive, saying they would increase insecurity for the elderly with jobs.
It also cautioned the government against abandoning its consolidation course, saying budget risks had increased because of troubles in financial markets.