Germany’s consumer price inflation rose to 3.9% year-on-year in August, the highest since December 1993 and in line with market expectations, according to a Federal Statistical Office (Destatis) provisional report published on Monday (Aug. 30). The figure was marked an increase from the previous month when the inflation rate stood at a 28-year high of 3.8%.
The end of VAT holiday introduced by the German government as part of the COVID-19 stimulus package and the rise in oil prices explained some of the rise, Destatis said. The reduction in VAT was in effect from July 1 to December 31, 2020 in order to stimulate consumption at the peak of Covid.
Additional factors were the introduction in January 2021 of the 25 euros (29.5 U.S. dollars) per tonne carbon price in the transport and housing sectors, as well as
crisis-related effects, such as marked price increases at upstream stages in the economic process.
Energy prices, including household energy and motor fuels, recorded the highest increase at 12.6% year-on-year. Food prices increased by 4.6%. Rents and service prices continued to increase moderately in Germany year-on-year, up by 1.3% and 2.5% respectively.
“The current increase is likely to remain temporary,” Christine Volk, chief economist at public lender KfW, told AFP news agency. A return to inflation under the European Central Bank’s (ECB) 2% target was likely, she said, but warned that shortages of key components such as computer chips could have an “impact on consumers’ wallets, as companies are likely to pass on the higher costs at least partially.”
Central bankers say the current rise in prices is a temporary fallout of the economic disruptions caused by Covid. But other economists are skeptical and warn that high inflation could last longer than central bankers currently think.
The latest figures will come as a huge worry to the European Union, as Germany is the bloc’s top economy.
The final inflation data for August is due to be released on September 10. Last week, the Bundesbank, the German central bank, said inflation could remain above 2% “until mid-2022”.