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Energy prices drive return to inflation

Inflation in Germany crept higher in March, driven by rebounding energy prices, preliminary data showed on Monday.

Energy prices drive return to inflation
Photo: DPA

The national consumer price index (CPI) rose by 0.3 percent year-on-year in March, up from 0.1 percent in February, federal statistics office Destatis said in a statement.

But the Harmonised Index of Consumer Prices (HICP) – the yardstick used by the European Central Bank (ECB) – was also back in positive territory, rising by 0.1 percent year-on-year in March, compared with a drop of 0.1 percent the previous month.

Nevertheless, both numbers are way below the ECB's target of 2.0 percent, which the central bank defines as price stability.

The March data are still only preliminary, since they are based on consumer price statistics from only six out of Germany's 16 regional states.

Final data including all 16 states will be published on April 15, Destatis said.

Analysts said the data should offer some hope that the eurozone can avoid a dangerous deflationary spiral of falling prices, since energy prices – which have fallen sharply in recent months — are now back on the increase.

The modest pick-up in inflation "was driven by a modest rebound in the oil price, amplified by the weaker euro," said Berenberg Bank economist Christian Schulz.

Commerzbank economist Marco Wagner agreed."According to our calculations, this increase is mainly attributable to energy prices, which have been rising again since February," he said.

"We assume that the inflation rate in Germany will continue rising in the course of the year. Energy prices will probably start to increase more quickly around mid-year. Moreover, labour costs, which are accelerating in part due to the minimum wage, will also intensify the underlying inflation pressure,"Wagner said.

The Commerzbank economist predicted that German inflation could reach around 2.0 percent by the end of this year.

Capital Economics economist Jennifer McKeown said she expected energy prices "to continue to exert a heavy drag on the headline rate for the next six months or so, which may see headline inflation dip back into negative territory in the near future. But the drag should ease somewhat later this year."

Given the relative strength of the German economy, "there is little risk of sustained deflation in Germany. And temporary falls in inflation and price cuts should have positive effects" on the economy, McKeown said.

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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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