Reduction in value-added tax dampens inflation

Reduction in value-added tax dampens inflation

Inflation in germany slipped below the zero mark in september for the second time since the reduction in value-added tax.

Consumer prices were 0.2 percent below the level of the previous month, as the federal statistical office announced on tuesday on the basis of preliminary data. Annual inflation thus fell to its lowest level since january 2015, when it was minus 0.3 percent.

Statisticians in wiesbaden had already calculated negative annual inflation of minus 0.1 percent in july of this year, and consumer prices stagnated in august.

The temporary reduction in value-added tax rates and a sharp drop in energy prices are putting a damper on price increases. From august to september 2020, consumer prices also fell by 0.2 percent, according to calculations by the federal office.

In order to cushion the economic consequences of the corona crisis and revive the economy, the federal government has, among other things, reduced the value added tax rate from 1. July on for half a year: from 19 to 16 percent and from 7 to 5 percent respectively. This should boost consumption as an important pillar of the domestic economy.

The extent to which the tax cut is passed on to consumers is difficult to prove statistically. Economists at commerzbank explained on tuesday that "in some cases there were considerable price fluctuations for individual groups of goods and services".

Tickets for long-distance rail travel, for example, had become cheaper, while prices for other services had risen, in some cases substantially. The federal office itself pointed out that hairdressing in germany has become significantly more expensive in recent months – partly because salons have additional costs due to corona-related hygiene requirements.

Consumers had to pay significantly less in september than a year ago, according to the federal office for household energy and fuels (minus 7.1 percent). By contrast, food prices rose by 0.6 percent, although the upward trend in this product category has been weakening for months.

Falling or even negative inflation rates are usually an alarm signal for watchers. The european central bank (ECB) is aiming for an annual inflation rate of just under 2.0 percent in the medium term for the eurozone with its 19 states. According to the forecasters, this is far enough away from the zero mark. If prices are permanently low or fall across the board, this could tempt companies and consumers to postpone investments – in the belief that things may soon become even cheaper. This wait-and-see attitude can put the brakes on the economy.

Economists expect inflation in germany to pick up again significantly next year when the special effect of the value-added tax cut comes to an end.

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