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German Elation at Signs of Deflation

Deflation is not as much of a concern in Germany as it is in the rest of the euro zone.
  • Why it matters

    Why it matters

    • Signs of deflation in Germany are likely to boost, not slow consumer spending in Europe’s largest economy.
  • Facts


    • Germany’s inflation rate turned negative in January for the first time since 2009. Annual prices fell 0.5 percent in E.U.-harmonized terms.
    • German energy prices dropped 9 percent year-over-year, providing a boon to consumer spending at the pump.
    • About one quarter of the euro zone may be experiencing actual deflation – a broad-based drop in prices that could actually cause some consumers to delay purchases.
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Living in Germany just got a little bit cheaper – so what’s the problem?

It is one of the stranger aspects of the euro zone’s economic crisis. Many parts of the 19-nation currency bloc are concerned that falling prices — deflation — could grind their economies to a halt. The European Central Bank this month roared into action, making plans to launch a €1.1 trillion program to buy sovereign and private debt, to stop this from happening.

And yet, the news on Thursday that falling prices have hit Germany, too, has left most people here celebrating.

“To fall into panic and speak of deflation in Germany, I consider an exaggeration,” Stefan Schneider, the chief economist of Deutsche Bank, told Handelsblatt Global Edition. “So, let’s enjoy it!”

Consumer prices in Europe’s largest economy fell by 0.5 percent over the last 12 months, the first year-over-year decline since 2009, according to figures released Thursday afternoon. The dip was fueled by the global drop in oil prices: Energy costs in Germany fell 9 percent in the period. Take away the oil effect, and most economists estimate prices in Germany rose as much as 1 percent.

Unlike some other countries in the euro zone, where the prospect of a long period of deflation is a real fear, the situation in Germany is not expected to last long. That means German consumers get to enjoy the benefits of cheap oil without having to fear the consequences.

“This is really a very temporary affair,” said Timo Klein, a senior economist covering Germany at consulting firm IHS Global Insight in Frankfurt. “I expect we will be returning to positive headline inflation no later than the middle of this year.”

“To fall into panic and speak of deflation in Germany, I consider an exaggeration... So, let’s enjoy it!”

Stefan Schneider, Chief Economist, Deutsche Bank

Falling oil prices are good news for households and consumers, who can spend more on other things. The same applies to companies, which have lower energy costs and enjoy higher profits. Surveys of consumer and business confidence have been rising in Germany as a result.

The situation is different for Germany’s neighbors. Consumer prices for the euro zone have been on average about half a percentage point lower than in Germany – consumer prices fell 0.6 percent in January, according to data released Friday morning by Eurostat, marking the second straight month that prices have fallen. Negative prices are expected to remain a fact of life for much of this year.

Declining energy prices are good for consumers in the euro zone, too, but the fear is that the problem will spread. The ECB has said that deflation is a real concern for the currency bloc and needs to be prevented at all costs. A broad fall in prices can bring an economy to a standstill if it leads households to delay purchases – which is what happened in Japan. That danger prompted the ECB to move ahead with its quantitative easing program, over German objections, earlier this month.

German Prices-01


There are no signs in Germany that consumers are holding back on spending money. In fact, the opposite is happening. A consumer confidence survey from the German research group GfK found that the “willingness to save” was at a record low last month. Consumers are especially eager to buy durable goods – longer-lasting items like cars and washing machines.

Aside from falling oil prices, most things point to prices rising in Germany over the coming months. Demands by many labor unions for higher salaries in Germany, coupled with the introduction of the minimum wage, should push up labor costs this year. The falling euro, which has lost about 20 percent of its value since last April, should also start to push up the cost of goods that are imported from abroad.

“In Germany, the improving economy should lead the inflation rate back into positive territory by the summer, despite the dampening oil price effect,” said Stefan Kipar, an economist with the German bank BayernLB.

Germany’s government expects consumer prices will rise about 0.8 percent on average over the whole of this year. Excluding falling oil and falling food prices, and inflation will be around 1.4 percent.

The fact that Germany is suffering from low inflation at all is something of a puzzle. Unlike much of Europe, Germany’s economy is by all accounts running at full steam. Unemployment is at its lowest level since East and West Germany were re-unified in 1991.

By many accounts, Germany’s economy should even be overheating right about now. The ECB has kept interest rates across the euro currency zone at record lows in a bid to help Germany’s neighbors out of their economic slump. But Germany doesn’t really need the help – so why aren’t prices going through the roof?

The reason comes down to culture, according to Mr. Schneider of Deutsche Bank. Ever since the country experienced a bout of hyper-inflation in the early 1920s, erasing the savings of many families, the need to watch one’s spending habits has been engrained in the minds of most German households.

The fear that hyper-inflation could happen again is a key reason that most Germans have been wary of the ECB’s efforts to push down interest rates across the euro zone. Many worry the ECB’s policies could push their own economy into overdrive.

Mr. Schneider’s analysis suggests that Germany’s unique fears are the very reason this hasn’t happened. Even when times are good, Germans don’t demand exorbitant wages from their employers – unlike southern European economies that splurged when they first joined the euro in the early part of the last decade. Over the last 10 years, Germany’s prices have climbed on average just 1.2 percent per year.

For Germany, low inflation is simply a fact of life these days.

“It’s an interesting question to ask – where would the inflation rate be in Italy or Spain if it had the same economic conditions as Germany has right now?” asked Mr. Schneider.


Christopher Cermak has covered economics and central banks in Europe and the United States, and is now an editor with the Handelsblatt Global Edition in Berlin. Axel Schrinner is an editor covering policy and economics for Handelsblatt in Düsseldorf. To contact the authors: and

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