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Consumer prices fall for first time in 22 years

Inflation in Germany dropped 0.5 percent last month compared to the same period in 2008 – the first such decline in 22 years – raising the spectre of deflation amidst the worst economic downturn since World War II.

Published: 11 August 2009 17:03 CEST

Consumer prices fall for first time in 22 years

Photo: DPA

Month-to-month consumer prices held more or less steady, the Federal Statistics Office said from Wiesbaden. June and May inflation was at 0.1 percent and 0.0 percent respectively. July 2009 numbers were slightly higher due to seasonal price adjustments.

Much of the adjustment in prices were due to the drop in the price in energy, which in total fell 11.5 percent in July 2009 compared to July 2008. Food prices also fell 2.4 percent compared with one year ago and other goods, such as electronics (down 10.1 percent), saw reductions as well.

Most observers do not yet believe Germany faces the imminent threat of deflation, which occurs when prices enter a dangerous downward spiral. But the figures are sure to raise eyebrows in Europe’s largest economy. Christian Dreger of the German Institute for Economic Research (DIW) told newspaper Die Welt said economist will be looking to see if consumer prices start to rise again in September.

The Statistics Office found that the only place where prices went up in month-to-month comparisons were on vacation packages. Consumers had to pay more for holidays (14.5 percent), air travel (10.5 percent) and accommodations (9.5 percent) while travelling this summer.

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How is Denmark's economy handling inflation and rate rises?

The council, led by four university economics professors commonly referred to as “the wise men” or vismænd in Denmark, gave a much rosier picture of Denmark’s economy in its spring report, published on Tuesday, than it did in its autumn report last year.

“We, like many others, are surprised by how employment continues to rise despite inflation and higher interest rates,” the chair or ‘chief wise man’, Carl-Johan Dalgaard, said in a press release.

“A significant drop in energy prices and a very positive development in exports mean that things have gone better than feared, and as it looks now, the slowdown will therefore be more subdued than we estimated in the autumn.”

In the English summary of its report, the council noted that in the autumn, market expectations were that energy prices would remain at a high level, with “a real concern for energy supply shortages in the winter of 2022/23”.

That the slowdown has been more subdued, it continued was largely due to a significant drop in energy prices compared to the levels seen in late summer 2022, and compared to the market expectations for 2023.

The council now expects Denmark’s GDP growth to slow to 1 percent in 2023 rather than for the economy to shrink by 0.2 percent, as it predicted in the autumn.

In 2024, it expects the growth rate to remain the same as in 2003, with another year of 1 percent GDP growth. In its autumn report it expected weaker growth of 0.6 percent in 2024.

What is the outlook for employment?

In the autumn, the expert group estimated that employment in Denmark would decrease by 100,000 people towards the end of the 2023, with employment in 2024 about 1 percent below the estimated structural level.

Now, instead, it expects employment will fall by just 50,000 people by 2025.

What does the expert group’s outlook mean for interest rates and government spending?

Denmark’s finance minister Nikolai Wammen came in for some gentle criticism, with the experts judging that “the 2023 Finance Act, which was adopted in May, should have been tighter”. The current government’s fiscal policy, it concludes “has not contributed to countering domestic inflationary pressures”.

The experts expect inflation to stay above 2 percent in 2023 and 2024 and not to fall below 2 percent until 2025.

If the government decides to follow the council’s advice, the budget in 2024 will have to be at least as tight, if not tighter than that of 2023.

“Fiscal policy in 2024 should not contribute to increasing demand pressure, rather the opposite,” they write.

The council also questioned the evidence justifying abolishing the Great Prayer Day holiday, which Denmark’s government has claimed will permanently increase the labour supply by 8,500 full time workers.

“The council assumes that the abolition of Great Prayer Day will have a short-term positive effect on the labour supply, while there is no evidence of a long-term effect.”

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