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ECONOMY

German consumer prices rise by highest level in three decades on back of pandemic measures

German consumer price inflation remained at euro-era high levels in August, preliminary data showed Monday, climbing slightly to 3.9 percent on the back of one-off effects related to the coronavirus pandemic.

German consumer prices rise by highest level in three decades on back of pandemic measures
The price of consumer good has gone up sharply. Photo: dpa | Mohssen Assanimoghaddam

The end of a VAT holiday introduced by the German government to mitigate the impact of pandemic lockdowns on the economy and the rise in the price of oil explained some of the increase, according to federal statistics agency Destatis.

The August 12-month inflation figure was 0.1 percentage point higher than in the previous month, and the highest value in Europe’s top economy since December 1993, when it came in at 4.3 percent.

“The current increase is likely to remain temporary,” said Fritzi Koehler-Geib, chief economist at public lender KfW.

A return to inflation under the European Central Bank’s (ECB) two-percent target was likely, she said, but warned that persistent shortages in key components, such as computer chips, could “impact on consumers’ wallets, as companies are likely to pass on the higher costs at least partially”.
The ECB recently raised its inflation target to two percent, and said it would tolerate temporary over- or undershooting of the target before stepping in.
Policymakers at the Frankfurt institution will meet next week to discuss their next moves.
While interest rates are set to remain at historic lows, high German inflation will fan debate about when the ECB should start removing some of its vast stimulus for the euro region. Germany is traditionally wary of inflation for historical reasons.
Extreme hyper-inflation in the early 1920s devastated the economy and fuelled political instability in the fledgling Weimar Republic which preceded Nazi rule.
Germany has been among the loudest critics of the ECB’s ultra-loose monetary policy.
In a note published last week, the German central bank, the Bundesbank, said inflation could remain above 2 percent “until mid-2022”.

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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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