Thursday, 20 December 2007

Inflation on the rise in Germany

Prices had risen by 3 per cent in November 2007 since the same month the previous year, according to data published by the German Federal Office of Statistics. This is the highest level of inflation in Germany for thirteen years. Worse, it comes against the background of an expected decline in economic growth in 2008. In several Länder, the inflation rate was above 3 per cent: in Saxony, for instance, it reached 3.4 per cent.

One of the main causes is the rise in the cost of food, especially bread and dairy products. The price of these has risen by between 3.7 per cent and 7 per cent in different regions, while milk has gone up by no less than 25 per cent. Rising oil prices are also a factor. Gas and electricity prices are also expected to rise at the beginning of next year.

Finally, the increase of VAT to 19 per cent has obviously pushed up prices. It is now unlikely that inflation in the largest European economy will fall below 2 per cent much before the middle of 2008, if then. Two per cent is the target rate fixed by the European Central Bank. The chief economist of the ECB, the German Jürgen Stark, has said that no one can be pleased at the present situation. [Welt am Sonntag, 25 November 2007]

Other economists have said that the situation is not so grave since the price rises come from “outside”: this is the view of Wolfgang Nierhaus of the IFO Institute in Munich, although presumably even he would admit that it is inflation nonetheless. This is one of the reasons why Berlin is not overtly hostile to the current strength of the euro: although it may hurt German exports, it also dampens the rise in the cost of imports like oil. This is why the German Finance Minister, Peer Steinbrück, has said, “No one has an interest in a weak euro.” [Handelsblatt, 27 November 2007]

On the other hand, unemployment has fallen in Germany – by 55,000 to 3.38 million. This is the lowest level for thirteen years, since November 1992. There are now 617,000 fewer people out of work in Germany than there were a year ago, and the overall rate has fallen by 0.1 to 8.1 per cent. A year ago it was at 9.6 per cent. The fall in joblessness is even higher than experts had predicted: they thought the total figure would fall to 3.42 million.

Economists say that the “very strong” economy is the reason for the fall. They are therefore not expecting the number to rise back to 4 million this winter, as happened in the worst years. It is expected that the fall will carry on into the first half of 2008. One economist at the IFO Institute has said that German companies are very happy to hire people at the moment and that there are plenty of job vacancies. The good figures for November follow a fall of 110,000 to 3.432 million out of work in October, or 8.2 per cent of the workforce. [Die Welt, 29 November 2007]

---- An excerpt from John Laughland's Intelligence Digest. For a free e-mail subscription to the Intelligence Digest, please click here ----

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