German consumer prices fell in September, official data showed on Tuesday, September 29, dragged lower by a sales tax cut brought in to help Europe’s top economy weather the coronavirus upheaval.
Inflation turned negative at -0.2% in September year-on-year, according to preliminary data from federal agency Destatis, after being flat in August and reaching -0.1% in July.
Destatis said the dip was due in part to Germany’s cutting of value-added tax (VAT) in July to boost spending. The tax reduction is set to last until the end of the year.
“Many aspects of the recent drop in inflation can be explained rationally: VAT reduction, social distancing, devastating summer for tourism in many countries,” said ING’s Carsten Brzeski.
“However, it would not be the first time that falling prices, driven by one-off factors, compared with economic uncertainty and increasing unemployment could develop into a deflationary spiral.”
Deflation, or a spiral of falling prices, can deter customers from spending in anticipation of even cheaper prices, creating pressure on businesses who may end up cutting jobs or closing down.
Energy prices in Germany continued to dive in September, falling 7.1%, while food prices rose 0.6%, Destatis said.
The German economy slumped 9.7% in the 2nd quarter of 2020, its sharpest decline since records began, but Economy Minister Peter Altmaier said earlier in September that the country is in a “V-shaped” recovery.
German gross domestic product is still expected to fall 5.8% in 2020.
Falling prices adds to fears that Europe’s largest economy will drag down eurozone inflation, to be released on Friday, October 2, causing anxiety among European Central Bank (ECB) policymakers.
According to the ECB’s preferred yardstick, known as the Harmonized Index of Consumer Prices (HICP), German inflation fell 0.4% year-on-year – far off the ECB’s inflation target of just under 2%.
The bank’s board is already split on next steps as part of its monetary stimulus, between those who believe the ECB’s policies should be more restrained and those who think the bloc’s fragile recovery needs more support.
Euro area inflation was -0.2% in August and “is expected to remain negative over the coming months,” according to ECB chief Christine Lagarde. – Rappler.com
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