Germany’s consumer price inflation is expected to have weakened in April from a year ago, according to provisional official data, as a base effect showed that average energy prices in Europe’s largest economy slowed down.
“The inflation rate in Germany is expected to be +7.2% in April 2023”, from 7.4% in the same month a year ago, as measured by the consumer price index , the federal statistics agency Destatis said in a press release on Friday.
The rate of increase in household energy and motor fuel prices stood at 6.8 percent, according to provisional data, more than five times lower than April’s 36.05 percent of 2022.
But this decrease does not necessarily mean that energy inflation is decreasing, as the comparison was year-over-year, as opposed to when it was month-over-month. Destatis attributed the drop to a base effect — a change in the outcome of the comparison by choosing a different reference period — from last year’s war-induced spike in energy prices. This base effect means that there was a dramatic decrease as prices were very high in the base or reference month of the comparison.
Meanwhile, the German economy contracted 0.1 percent in the first quarter of 2023 from January-March 2022 when prices and timing were adjusted, Destatis said in a separate update on Friday. Seasonally adjusted and calendar-adjusted gross domestic product (GDP) recorded zero growth between January and March 2023.
Despite an inflation rate of 7.9 percent in 2022, Germany’s price-adjusted GDP grew by 1.8 percent as household consumption spending rose by 3.4 percent, according to a statement from Destatis on March 15.
Base effect
The statistics office noted that the rate of change in energy prices between April 2023 and April 2022 was narrower than the overall index.
Destatis noted: “There is a base effect as the index level was high in April 2022 after energy prices had shot up following the Russian attack on Ukraine.”
“Furthermore, the Federal Government’s third relief package measures, which are reflected in the consumer price index, have contributed to the current slowdown in energy price increases,” the office added .
With a total value of 72 billion dollars (65 billion euros), these measures include a temporary reduction of the value added tax on gas and district heating to seven percent from October 2022 to March 2024 , a reduction in natural gas and heat bills in December 2022, a price cap for household and business consumers starting in January 2023 and a discount on public transport with tickets of 55 dollars (49 euros) a month from May 1, 2023.
The European Commission’s predictions published on February 13, 2023 put Germany’s consumer price inflation at 6.3 percent and its GDP at 0.2 percent for this year.
The Leibniz Institute for Economic Research at the University of Munich (ifo) said consumer price inflation in the country is likely to slow to 6.2 percent in 2023, according to its March 15 forecast . it forecast a contraction in price-adjusted GDP of 0.1 percent.
“It is not clear how private households will react to large price increases and the associated liquidity squeeze. It is quite conceivable that they will increase their propensity to save and allocate an increasing share of their income, possibly as a precautionary measure. This it would have a greater impact on private consumption,” said ifo.
“Domestic price dynamics could also weaken more slowly than expected, for example because collectively agreed wage increases or profit expansions turn out to be larger,” he added. “This would delay the fall in the underlying inflation rate and require a tighter monetary policy response.”
Germany was the only European Union economy to record a contraction in the first quarter of 2023 compared to a year ago, according to Eurostat estimates released on Friday. According to the bloc’s statistics agency, seasonally adjusted collective GDP of EU nations using the euro is expected to have increased by 0.1 percent between January and March 2023 compared to the same quarter in 2022, while that of the EU has grown by 0.3 percent. .
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