Worrying About Deflation German Consumer Prices Fall For First Time in 22 Years
Latest figures confirm the first annual decline in Germany's consumer price index in decades. For some, the deflationary figures raise the specter of the Great Depression. Others say the decline will only be short term.
This week German statisticians confirmed the first annual decline in consumer prices in the country for more than 22 years.
Drops due: The German consumer price index has fallen more than expected
Meanwhile another indicator of price movements, wholesale prices, also dropped -- by 10.6 percent in July year-on-year, the biggest fall since the data began to be compiled in 1968.
This leaves Germany with minor deflation - the country's inflation rate made headlines when it went to zero in May, it then climbed up to 0.1 percent in June before dropping again in July.
The price drops, which were larger than expected, can be blamed on the fact that the price of crude oil has almost halved over the past year, going from around $147 a barrel to around $65 -- this also happened in 1987, the last time Germany saw this kind of deflation. The drops are also explained by a fall in food prices, which had been experiencing a global high and which are now between 1.2 percent and 3.3 percent lower than in July 2008. Additionally the current recession is also responsible for Germany's deflationary situation -- an oversupply of goods and services, a looming credit crunch, worsening unemployment, shrinking national growth rates and, generally, weaker economic activity all play a part.
The same deflationary trend has been seen in other European Union states. But fortunately, most analysts are predicting that Europe's deflation won't last long.
"We expect the current episode of extremely low or negative inflation rates to be short-lived," said Jean-Claude Trichet, president of the European Central Bank, in a statement released earlier this month.
The inflation rate preferred by the European Central Bank, the body charged with keeping the euro zone currency stable, sits at around or just below 2 percent. And although Germany's current deflation may go on for several months longer, other recent data has shown that markets are slowly recovering.
So far the most noticeable effect of the recent deflationary figures has been on the euro's exchange rate. Because Germany is the largest economy in the euro zone, the country's inflation indicators have had a significant effect on the currency, which fell to a two-week low against the dollar and also dropped against the pound.
cis -- with wires