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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.

Published: 30 August 2021 17:27 CEST

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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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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