The inflation rate in Germany, measured as the year-on-year change in the consumer price index, is expected to pick up to 3.8% year-on-year in July of 2021, data from the Federal Statistical Office (Destatis) revealed on Thursday (July 29).
It is the first time since 2008 that inflation in Germany has reached such levels. On a month-on-month basis, prices rose by 0.9% from June to July in Europe's largest economy.
The further increase of the inflation rate in July is mainly attributed to the value added tax effect, after the government cut the tax temporarily in the second half of 2020 as part of Covid19-related economic support.
Amid falling consumer demand during the pandemic, the German government cut its VAT rates to 16% and 5% in the second half of 2020, from previously 19% and 7%. Since January 2021, the VAT rates of nearly all goods and services have been back to their previous levels as businesses reopened.
Goods inflation advanced to 5.4% in July from 3.1 percent, amid rising energy and food prices, Also, services inflation is likely to accelerate to 2.2% from 1.6%.
Higher producer prices on the back of supply chain disruptions, higher commodity prices and the gradual reopening of the economy are all impacting consumer prices, Carsten Brzeski, head of macro research at ING said.
German central bank chief Jens Weidmann last week warned that inflation in his country will “go in the direction of the 5 per cent mark towards the end of the year” and voiced concern that the European Central Bank (ECB) might keep interest rates low for too long.
On July 8, the ECB hiked its inflation target from “below but close to 2%” to a symmetric 2% target over the medium term, which means that the Frankfurt-based institution would tolerate temporary over- or undershooting of the target before stepping in.
Consumer prices worldwide have been rising steadily in recent months.
Although policymakers tend to view inflation as a passing phenomenon, it actually looks like a long-term issue with critical implications for the health of the world economy.
In a recent research paper, Deutsche Bank projects a significant burst of inflation in 2022, as governments have made various social goals a bigger priority than controlling inflation and the rise of government debt.
“Higher inflation is coming and policymakers are about to face their toughest battle in 40 years," the lender warns.
Inflation is not something that should be keeping people up at night but now turns out to be the new monster hiding under the bed as more people are out of work, are not able to find jobs, and a bunch of things get pricier.
“But, for the first time in many decades, there is the possibility that a significant turning point has arrived, that price rises will be more than a flash in the pan, and something more difficult to control” The Financial Times wrote in June.
The final results for July 2021 will be released by Destatis on August 11.