In Germany, the negative inflation, also called deflation, was recorded for the fourth time in a year. The deflation means the decrease in price levels for goods and services. In October 2020, in Germany, the aggregate index of wholesale prices for goods and services decreased by 0.2% in comparison with the previous month. On November 13, 2020, the Federal Statistical Office of Germany (Destatis) reported that the wholesale prices for only goods had fallen by 1.9% over the year [Destatis, 2020a]. Based on data of the year-on-year change in consumer price index collected by Destatis (2020b), the inflation rate reached -0.3% in November 2020. Moreover, in the last month, the harmonized index of consumer prices (HICP), the term of consumer price inflation followed by the countries of the European Union to maintain the price stability and used for policymaking by the European Central Bank, decreased to -0.7% compared with the previous year and -1.0% compared with the previous month. Recently, Germany is experiencing the phenomenon of deflation. The inflation trend will continue to move in a negative direction for the upcoming months.
The inflation in the second half of 2020 went negative and consumer prices decreased for the first time in more than four years due to the temporary reduction of the value-added tax (VAT) introduced in August of this year. According to Nienaber (2020), the VAT was reduced in Germany for a period of six months – from July 1 to December 31, 2020 – to recover the country’s economy from the outbreak of COVID-19. The government cut the regular VAT rate to 16% instead of the usual 19% and the preferential rate to 5% instead of 7%. Thus, the state waives the tax revenues in the amount of 20 billion euros ($24 billion), leaving the money in the pockets of consumers and in bank accounts of companies and enterprises. Since the VAT is a tax that is charged on almost every product or service, the reduction of this tax will, in theory, lead to a fall in wholesale prices. The German government ordered companies and enterprises to change the price tags for goods and services.
The negative inflation is an alarm for the government and economists as it can be a very destructive moment for a market economy. However, the government of Germany anticipated the potential negative impacts of the deflation and from January 1, 2021, the VAT rate will return to the normal level, which will stabilize the dynamics of price levels on goods and services. According to the projections of the European Central Bank (2020), HICP inflation is expected to reach 1.0% in 2021 and continue rising to 1.4% in 2023 annually. The policymakers of the US Federal Reserve believe that the optimal inflation rate should be around 2%, which is the rate that is neither high nor low [Federal Reserve System, 2020].
Despite the phenomenon of deflation observed in Germany, the food prices rose by an average of 1.4% in comparison with March 2019 [Fleischwirtschaft, 2020]. For instance, prices for meat and meat products have increased by 3.9%, fruit – by 3.7%, vegetables – by 2.6%. However, prices for some food products dropped. Destatis (2020c) concluded that the prices for animal fats and vegetable oils have decreased. These goods are less in price by 3.8% than in the previous year. This kind of tendency is observed particularly in the German food market in comparison with the rest of the world. In November 2020, the Food and Agriculture Organization of the United Nations (FAO) monitored the prices in the oil crop industry around the globe. The records of FAO showed that the price index for vegetable oils have increased by 14.5% at the end of November due to the rise in prices of palm oil amid a sharp decline in its global reserves. Moreover, FAO notes that the increase in the price index of the vegetable oil was the highest in six years. Nevertheless, Destatis reports that the situation in the German food market, which is the largest in the European Union, remains stable. In terms of consumer services, the prices for services have increased by 1.1% in November 2020 compared to the same month last year. As stated by Treus (2020), the increase in rents amounted to 1.4%, in bank charges – 6.7% and in home services – 6.5%.
Overall, the current situation of negative inflation in Germany is an interesting phenomenon. Since the price levels are decreasing, Germans spend less money resulting in reduction of demand, which will in return depress the economy of the country. Moreover, due to the spread of COVID-19, the government of Germany introduced a package of anti-crisis measures to stabilize the economic situation in the country that included the decrease of the value-added tax on the entire list of goods and services. It is predicted that Germany will observe negative inflation in near future, however, the country is expected to recover from the economic downturn since the measure of decreased VAT is temporary.
Destatis (2020a). Wholesale prices in October 2020: -1.9% in October 2019. Retrieved from https://www.destatis.de/EN/Press/2020/11/PE20_450_61281.html;jsessionid=2BEE2D76949629D450115B14FE0DE543.internet8742. Accessed on 14.12.2020.
Destatis (2020b). Inflation rate of -0.3% in November 2020. Retrieved from https://www.destatis.de/EN/Press/2020/12/PE20_496_611.html. Accessed on 14.12.2020.
Destatis (2020c). Price Monitor. Retrieved from https://www.destatis.de/EN/Themes/Economy/Short-Term-Indicators/Pricemonitor/pricemonitor.html. Accessed on 14.11.2020.
European Central Bank (2020). Macroeconomic projections. Retrieved from https://www.ecb.europa.eu/pub/projections/html/index.en.html. Accessed on 14.12.2020.
Federal Reserve System (2020). What is an acceptable level of inflation? Retrieved from https://www.federalreserve.gov/faqs/5D58E72F066A4DBDA80BBA659C55F774.htm. Accessed on 14.11.2020.
Fleischiwirtschaft (2020). Consumer prices for food on the rise. Retrieved from https://english.fleischwirtschaft.de/economy/news/Germany-Consumer-prices-for-food-on-the-rise-40953. Accessed on 14.11.2020.
Food and Agriculture Organization of the United Nations (2020). FAO price indices for oilseeds, vegetable oils and oilmeals. Retrieved from http://www.fao.org/economic/est/est-commodities/oilcrops/price-indices-for-oilcrops-and-derived-products/ru/. Accessed on 14.12.2020.
Nienaber, Michael (2020). VAT cut pushes German inflation into negative territory. Retrieved from https://www.reuters.com/article/us-germany-economy-inflation-idUSKBN25R1MB. Accessed on 14.12.2020.
Note: The views expressed in this blog are the author’s own and do not necessarily reflect the Institute’s editorial policy.
Dautova Ilana holds a Bachelor of Science degree in Economics from KIMEP University (Almaty, Kazakhstan). She has also studied at the Foundation course at Lancaster University (Lancaster, United Kingdom) and on the exchange program at Ewha Womans University (Seoul, South Korea). Previously, she worked as a business development manager at the POSCO International Corporation.