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ECONOMY

German inflation reaches 3.0 percent in May

German inflation reached 3.0 percent in May as the cost of energy stoked consumer price increases in the biggest European economy, figures released Friday by the Federal Statistics Office showed.

On a monthly basis, German consumer prices gained 0.6 percent, the stats office said. Energy prices pulled overall inflation higher, and when they were stripped out, the annualised rate dropped back to 1.9 percent, though “energy costs in the total expenditure of households was less than 10 percent,” the report noted.

May marked the second time this year that German inflation has reached the 3.0 percent threshold, following an increase of 3.1 percent in March. A breakdown of the numbers showed that fuel prices climbed by an average of 12.3 percent from May 2007, with diesel fuel posting an increase of 26.4 percent, nearly erasing a previously significant difference with petrol.

Among other sources of energy, the cost of electricity gained 7.4 percent and the price of gas was 4.7 percent higher on the year. Food products were up by 7.5 percent, with milk, cheese and eggs gaining 18.9 percent.

Some decreases were also seen, in particular for information processing equipment such as computers, the price of which fell by an average of 15.7 percent. The cost of film and still cameras decreased by 11.7 percent, while communications prices were 3.6 percent lower and telecommunications equipment cost 16.3 percent less on average.

When calculated according to a harmonised consumer price index (HICP) that allows for comparison across the 15-nation eurozone, German inflation came in at 3.1 percent on an annual basis and 0.7 percent on the month.

The president of the European Central Bank, Jean-Claude Trichet, said last week that the ECB might raise its main lending rate by a small amount in July to quash expectations that eurozone inflation could spiral out of control.

The bank has raised its forecast for inflation this year to 3.4 percent, and its estimate for 2009 to 2.4 percent.

ECONOMY

German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.

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With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.

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