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ECONOMY

Consumer prices fall for first time in 22 years

Inflation in Germany dropped 0.5 percent last month compared to the same period in 2008 – the first such decline in 22 years – raising the spectre of deflation amidst the worst economic downturn since World War II.

Consumer prices fall for first time in 22 years
Photo: DPA

Month-to-month consumer prices held more or less steady, the Federal Statistics Office said from Wiesbaden. June and May inflation was at 0.1 percent and 0.0 percent respectively. July 2009 numbers were slightly higher due to seasonal price adjustments.

Much of the adjustment in prices were due to the drop in the price in energy, which in total fell 11.5 percent in July 2009 compared to July 2008. Food prices also fell 2.4 percent compared with one year ago and other goods, such as electronics (down 10.1 percent), saw reductions as well.

Most observers do not yet believe Germany faces the imminent threat of deflation, which occurs when prices enter a dangerous downward spiral. But the figures are sure to raise eyebrows in Europe’s largest economy. Christian Dreger of the German Institute for Economic Research (DIW) told newspaper Die Welt said economist will be looking to see if consumer prices start to rise again in September.

The Statistics Office found that the only place where prices went up in month-to-month comparisons were on vacation packages. Consumers had to pay more for holidays (14.5 percent), air travel (10.5 percent) and accommodations (9.5 percent) while travelling this summer.

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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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