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Wednesday, January 16, 2008

German Inflation 2007

German inflation accelerated last year to the fastest pace since records began in 1996, driven by a higher sales tax and rising energy prices. As reported by the Federal Statistical Office (Destatis), the consumer price index for Germany (as measured by the Federal statistics office methodology) rose by 2.2% on an annual average in 2007 compared with 2006 and by 2.3% using the EU HICP methodology. That was the highest year-on-year rate of price increase since 1994, following lower rates in 2006 (+1.7%), 2005 (+2.0%) and 2004 (+1.6%).

The priciple resonsibility for the accelerated price trend in 2007 lies with energy prices and the increase in VAT and insurance tax at the beginning of the year. In 2007, prices of energy products (household energy and motor fuels) rose 3.9%. Among all energy prices, electricity prices increased most strongly (+6.8%). Mineral oil products in 2007 were on average by 3.0% more expensive than in 2006 (of which motor fuels: +4.1%; liquid fuel: –1.2%).

Stripping out energy prices, the annual average of the year-on-year rate of price increase would have been 1.9%. The marked rise in the annual year-on-year rate of price increase in 2007, exceeding the two-percent threshold, was increasingly driven in the second half of the year by successive price rises for food (+3.1% on an annual average in 2007), in particular for some milk, flour and fat products by two-digit rates (including butter: +19.1%; flour: +15.4%; curd: +12.0% and full-cream milk: +10.3%).

Furthermore, the higher prices of education had an impact on the rate of price change already since April 2007, especially because of the introduction of tuition fees in some Länder. Also, prices of alcoholic beverages and tobacco (+3.1%) increased above average on an annual average in 2007; however, price increases were smaller than the total consumer price increase, for example, for consumer durables (+0.9%), clothing (+0.8%) and communication (+0.2%).

In December 2007, the consumer price index was up 2.8% on December 2006. Since September, the year-on-year rate of price increase constantly exceeded the two-percent threshold. November saw the annual peak (+3.1%), while in December the price rise slowed down a little (+2.8%). Compared with the previous month, the index was up 0.5% in December. In a year-on-year comparison, energy prices had an upward effect in December 2007, as was the case in the previous months, although prices of mineral oil products decreased towards the end of the month (including motor fuels: +11.9% on December 2006 and –5.4% on November 2007). Not considering the price trend of energy products (household energy and motor fuels), the year-on-year rate of price increase in December 2007 would have been only 2.2%. Mineral oil product prices were up 14.5% (including liquid fuel: +25.1%). Electricity prices, too, rose above average in December 2007 (+8.2% on a year earlier), whereas gas prices were down 2.4%.

Food prices in December 2007 were up an average 6.0% on December 2006. Prices rose considerably – as in the previous months – especially for oils and fats (+25.5%; including butter: +44.9%) as well as milk, cheese and eggs (+17.3%; including curd: +37.8%). Prices of bread and cereals, too, were markedly higher than a year earlier (+6.0%), including flour: +27.6%. For some items, however, price rises were markedly smaller than total consumer prices, that is, among other things, communication (+0.8%) and clothing (+0.1%). The marked 0.5% increase in the price index from November 2007 to December 2007 was mainly due to seasonal price trends.

What should especially be mentioned apart from price increases for some fruits and vegetables (including grapes: +16.0% and lettuce: +13.1%) is common price rises caused by the seasonal highlights (Christmas and New Year’s Eve) for package holidays (+32.5% on November 2007) and accommodation services (+20.8%). Seasonal month-on-month increases were also observed towards the end of the year for air fares (on average +6.7%) and rail fares (on average +3.6%). A consumer-friendly month-on-month trend was however shown especially by motor fuel prices (–5.4%; including supergrade petrol: –5.9%). For clothing and footwear, too, first price reductions on the previous month were observed (–1.0%) because of the coming seasonal change from the winter to the spring collections.

The harmonised consumer price index for Germany, which is calculated for European purposes, rose 2.3% on an annual average in 2007. In December 2007, the harmonised consumer price index was up 3.1% on December 2006. Compared with the previous month, the index climbed 0.7%. The estimates of 28 December 2007 were thus confirmed both for the consumer price index and for the harmonised consumer price index. Detailed information on consumer price statistics is contained in Fachserie 17, Reihe 7, which is available free of charge from the publication service of the Federal Statistical Office at www.destatis.de/publikationen, search word “Verbraucherpreisindex

Consumer prices rose 2.3 percent in 2007, using a harmonized European Union method, the Federal Statistics Office in Wiesbaden said in a statement today. It's the first year the increase in Europe's largest economy breached the European Central Bank's limit. Measured by national rules, inflation averaged 2.2 percent, the highest level since 1994.

As the effect on inflation of an increase in value-added tax last January wanes, ECB policy makers are concerned that rising oil and food prices will lead workers to seek higher pay and spark a wage-price spiral.

``It's a dramatic figure, but it was boosted by the VAT hike,'' said Luigi Speranza, an economist at BNP Paribas in London. ``While the inflation rate has peaked, elevated food prices will keep it above 2 percent until at least mid-year.'' The ECB targets an increase of just below 2 percent.

In December, inflation slowed to 3.1 percent from 3.3 percent the previous month, matching both the median in a survey of 29 economists and preliminary figures from Dec. 28. From November, consumer prices rose 0.7 percent.

Electricity & Butter

The price of butter rose 19 percent last year, and the cost of milk gained 10 percent, the statistics office said. Electricity prices increased 6.8 percent and car fuel rose 4.1 percent. Excluding energy costs the national inflation rate was 1.9 percent. Heating oil costs declined 1.2 percent.

In the euro area, European inflation averaged 2.1 percent in 2007, staying above the ECB's ceiling for an eighth year even after policy makers doubled interest rates in the 18 months through June last year. Inflation stayed at the highest in more than six years in December as food and energy costs soared.

ECB council member Axel Weber said yesterday that the bank won't tolerate pay increases that fuel inflation. ``There are indications of intensifying wage pressure, in particular in the public service,'' Weber said. ``We'll counter second-round effects as well as other risks'' to price stability ``resolutely.''

German public-sector workers want the biggest pay raise in 16 years. Ver.di, Germany's second-biggest labor union, is seeking 8 percent more for about 1.3 million workers on federal and local government payrolls.

Expectations, as measured by the break-even level of 10-year inflation-linked French government bonds, have risen 11 basis points to 2.19 percent since the ECB shelved plans to raise interest rates on Sept. 6 following a rout in U.S. subprime mortgages.

The Federal Statistics Office will publish a flash estimate of January inflation on Jan. 31. The six German states that provide the data for the estimate will not release figures separately this month, resuming normal procedure in February.

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