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ECONOMY

Finance Minister OKs three percent inflation

German Finance Minister Wolfgang Schäuble said on Thursday that a German inflation rate of up to three percent was tolerable, despite eurozone rules setting a target of around two percent.

Finance Minister OKs three percent inflation
Photo: DPA

“In Germany, two to three percent is a range that it is still acceptable,” Schäuble told reporters when asked about a potential easing of Germany’s strict anti-inflation stance in light of the debt crisis.

However, Schäuble warned that an extended period of high prices would be going too far, saying that the Bundesbank central bank would draw a line at any retreat from price stability.

The European Central Bank (ECB), which brings together the central bank governors from all the 17 nations that share the euro, aims to keep inflation close to, but below, two percent.

Schäuble said that German inflation was currently above two percent, acknowledging that the “target was not quite met.”

His comments came after a Bundesbank economist suggested one potential way out of the eurozone crisis was to boost domestic demand in Europe’s top economy and tolerate the slightly higher German inflation this could produce.

“Germany would in this scenario have in the future an above-average inflation rate compared to the eurozone,” the central bank economist wrote.

“But monetary policy would have to ensure that the average eurozone inflation rate corresponded to the (two-percent) target and that inflation expectations remained solidly anchored.”

Germany, Europe’s top economy, has long been seen as the most hawkish of eurozone members when it comes to inflation and was the chief architect of the ECB’s price stability policies.

The country’s wariness of runaway price increases is rooted in the trauma of the hyper-inflation it experienced during the 1920s, a period of major political instability that helped pave the way for the rise of the Nazis.

The eurozone debt crisis has put pressure on Berlin to do more to boost domestic demand as a way of helping its neighbours bounce back from the slump.

Schäuble said in comments published earlier this week that Germans deserved higher pay following years of wage restraint and labour market reforms.

“By raising pay, Germany would help reduce economic imbalances in Europe,” the minister added, referring to increased demand which would suck in exports from weaker eurozone states.

Germany’s inflation in April stood at 2.2 percent, using the ECB’s preferred yardstick – the Harmonised Index of Consumer Prices.

AFP/jcw

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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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