Inflation rage is coming to the boil in Germany. Leaders of the country's prestigious institutes warn that the economy is hitting capacity constraints and risks spiraling into a destructive boom-bust cycle.

In a series of interviews with The Telegraph they said that the ultra-loose monetary policy of the European Central Bank is now badly out of alignment with German needs. It has begun to threaten lasting damage, and is fast undermining political consent for monetary union.

"The ECB wants to inflate away the debt of the southern European countries. This is a clear conflict of interest with net creditors like Germany," said Clemens Fuest, president of the IFO Institute in Munich.

"There is a debate building up on the expropriation of German savers by the ECB. This is going to become very difficult if inflation approaches 2pc and they still do nothing. People will conclude that their true motive is redistribution," he said.

What is new is that Germany's inflation rate has suddenly jumped to 1.7pc after a long and deceptive period of quiescence. It is now much higher than in southern Europe.

The mechanical effect is to drive real interest rates to minus 2pc, lower than at any time in German history other than the two hyper-inflations after the First and Second World Wars.

Professor Clemens said the politics are poisonous because the ECB's majority bloc is openly sweeping aside German objections. This plays into the hands of the eurosceptic Alternative fur Deutschland (Afd), while the ruling Christian Democrats are toughening their line to stop a leakage of votes.

"The perception is that we are being dominated by foreigners. This is going to become a big issue in the campaign," he said.

The ECB plans to extend its programme of bond purchases until the end of the year after it expires in March, albeit trimming the pace from €80bn to €60bn a month.

Prof Clemens warned that this is far too slow. "They should start cutting by €10bn a month as soon as April, and end QE completely in October," he said.

The mix of rising inflation and negative rates is toxic for ordinary Germans, who keep much of their household wealth in bank accounts.

It is often claimed that Germany has a unique savings culture. The German term for debt (Schuld) is the same word as guilt. Putting money aside dutifully has a diamantine moral appeal with almost religious undertones.

Economists dismiss this is as a fallacy. Germany's savings habits are the result of tax laws, demographics, and the structure of the banking system. But whatever the cause, the political consequences matter.

The tabloid newspaper Bild Zeitung leapt on the latest price data, splashing with a "Horror-Kurve" showing inflation soaring to seemingly frightening heights.

David Fuller's view

ECB President Mario Draghi will not tailor monetary policy in favour of Germany when most other EU economies are still struggling to fend off deflation.  Moreover, GDP growth is only just starting to recover in Southern European nations.  They have endured economic depressions during recent years. 

Meanwhile, Germany’s economy is now booming and its rate of inflation has risen from just below zero last April to 1.7% in mid-December.  It could be close to 2% when this month’s figures are released, or even higher.  German house price increases were a modest 1.5% in 2H 2009 but are appreciating at more than 12% per annum today. 

The Bundesbank will continue to complain but Germany remains the chief beneficiary of Euroland.  If it left the single currency, a new Deutschmark would be far stronger and a headwind for Germany’s export-led economy.

These problems were widely anticipated by analysts who knew their currency history.  No single currency for several different countries has survived without fiscal union.  

Here is a PDF of AEP’s article.