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ECONOMY

German inflation lowest since October 2009

Inflation in Germany, Europe's biggest economy, slowed to just 0.2 percent in December, its lowest level in more than five years, and averaged 0.9 percent for the whole of 2014, according to new figures released on Monday.

German inflation lowest since October 2009
Monday's low inflation figures could spark fears of deflation Photo: DPA

In a preliminary flash estimate, the federal statistics office Destatis calculated that German inflation stood at just 0.2 percent year-on-year last month, down from 0.6 percent in November.

The last time inflation in Germany was lower than 0.2 percent was in October 2009.

Taking 2014 as a whole, inflation stood at an annual average 0.9 percent, Destatis calculated.

The flash estimate is based on consumer price data for six key German states. Final data on the basis of all 16 German states is scheduled to be released on January 16.

Using the Harmonised Index of Consumer Prices (HICP) — the yardstick used by the European Central Bank — inflation in Germany was even lower at 0.1 percent in December, way under the ECB's annual inflation target of just below 2.0 percent.

The chronically low level of inflation across the single currency bloc has fuelled concern the region could slip into deflation — a sustained and widespread drop in prices that hampers economic activity and could lead to job losses.

While falling prices may sound good for consumers, deflation can trigger a vicious spiral in which businesses and households delay purchases, throttling demand and causing companies to lay off workers.

Such concerns have persuaded the ECB to cut interest rates to a new all-time low and roll out other anti-deflation measures such as a series of asset purchase programmes to inject cash into the economy.

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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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