FRANKFURT—Germany is facing a unique dilemma as many euro-zone counterparts debate how much fiscal belt-tightening their citizens can withstand to restore sound public finances: how much inflation it can stomach to help its southern neighbors.
On Friday, Germany's central bank rejected speculation that it is softening its anti-inflation rigor, as its leader tried to keep a largely economic debate about restoring growth in Southern Europe from damaging the Bundesbank's cherished reputation in Europe's largest economy.
"The citizens can rely on the vigilance of the Bundesbank," its president, Jens Weidmann, told the German daily Süddeutsche Zeitung. He called the debate over whether the bank would let inflation gain a foothold as part of a broader economic rebalancing in Europe "absurd."
His comments came days after the Bundesbank's chief economist, in testimony to the German Parliament, said German inflation could be higher than the euro-zone average for a time if the country takes steps to boost its service sector and raise investment while Greece and others slash wages and government spending.
The testimony quickly touched off a flurry of anxious speculation, particularly in German media reports, that the country's chief inflation hawk was relaxing its guard and risking German economic health in favor of its neighbors.
"Inflation Alarm!" screamed a front-page headline in the influential daily tabloid Bild-Zeitung on Friday. "How quickly will our money be eaten away?" The daily Financial Times Deutschland weighed in with a piece titled, "Bundesbank tolerates higher inflation."
The central bank's remarks to Parliament, though, didn't reflect a sea change in the Bundesbank's anti-inflation philosophy that goes back more than half a century. Rather, it acknowledged a process slowly under way in the euro bloc, called "rebalancing." Economists for many months have said fragile economies such as Greece and Spain must become more efficient through wage cuts and productivity gains. The result in these countries will likely be very low inflation rates. For instance, Greek consumer prices are expected to fall 0.5% this year, the European Commission said.
Germany went through a similar belt-tightening process over the past decade, and given its recent economic strength, may see inflation rates above those of its southern neighbors, analysts say. The European Commission expects German inflation of 2.3% this year.
"There are two sides to the rebalancing story: the peripherals go through deflation, and the Germans give some relief by higher inflation," said Carsten Brzeski, economist at ING Bank, adding that the Bundesbank economist's testimony was "preparing the ground" for this process.
For now, German inflation is at its slowest pace in more than a year. Consumer prices rose just 2.2% in April from the previous year, Germany's statistics office said on Friday, below the euro zone's 2.6% average.
Still, angst over climbing prices has risen recently. Europe's low interest rates and the European Central Bank's moves to provide cheap loans to banks have triggered signs of a property-price boom in some parts of the country. And after a decade of little growth, German wages are also set to climb.
German Finance Minister Wolfgang Schäuble last week gave vocal support to higher wages for German workers, and signaled that German inflation in the 2% to 3% range is "acceptable."
Unions already have won wage increases of more than 6% in the public and telecommunications sectors in recent months. Spurred by corporate Germany's robust profit in recent years, the country's largest industrial union, IG Metall, is also pushing for a 6.5% wage increase for the 3.6 million workers it represents in negotiations this month.
On Friday, some 94,000 IG Metall members temporarily stopped or slowed production at German car makers BMW and Audi and others, such as engineering and electronics companies Siemens AG and Bosch GmbH.
Indeed, that type of rate wouldn't cause much of a stir in other major economies. U.S. inflation, for instance, was 2.7% through March. It is 3.5% in the U.K. Central banks in those countries have official interest rates near zero and have taken more aggressive steps than the ECB to spur growth by purchasing large quantities of government bonds.
Germany, though, remains scarred by the economic disarray of the 1920s, when the Bundesbank's predecessor, the Reichsbank, triggered hyperinflation by buying massive quantities of German government bonds, wiping out the savings of millions of Germans. That collective memory has shaped Germany's postwar hawkishness on inflation. To reinforce the history lesson, the Bild-Zeitung ran an image of a one-trillion reichsmark note from 1923 in its Friday edition.
But the inflation anxiety has persisted because of fears that even a modest uptick in prices would hurt the competitiveness of Germany's all-important exports and cut into the value of its savings, among the highest levels in Europe.
"If you are Volkswagen or the little [German] manufacturing company and are competing against the Chinese, will you really go for substantially higher wages? No," said Mr. Brzeski.
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