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ECONOMY

Price growth slows as German inflation tumbles

Inflation in Europe's largest economy Germany fell back sharply in May, official data showed, returning to sluggish levels after a spike related to the Easter holiday.

Price growth slows as German inflation tumbles
A file photo of Deutsche Bank headquarters in Frankfurt. Photo: DPA

Price growth stood at 1.4 percent year-on-year, federal statistics authority Destatis said in preliminary figures, some 0.6 percentage points lower than in April.

Most of the items like food, energy and goods that feed into the inflation index saw relatively stable price growth compared with last month.

But services inflation plummeted, from 2.1 percent in April to just 1.2 percent in May.

Analysts had last month noted that higher April inflation was mostly due to a late Easter pushing up prices for package holidays.

Price growth data for individual states like Hesse and Bavaria showed a massive slump in prices for all-inclusive trips this month.

April's 2.0-percent inflation reading had marked a rare moment of inflation being bang on the European Central Bank's target for industrial powerhouse Germany.

Despite years of ultra-low interest rates and 2.6 trillion in stimulus, the Frankfurt institution has struggled to meet its price stability target of inflation close to, but below 2.0 percent across the 19-nation eurozone.

Price growth was just 1.3 percent in Germany in May when measured using the Harmonised Index of Consumer Prices, the ECB's preferred yardstick.

READ ALSO: Germany under increasing pressure to boost spending

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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.

READ ALSO:

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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