German inflation very low

Consumer price inflation in Germany is at 0.8 percent year-on-year for the month of July, its lowest level since February 2010, according to the National Statistics Office (Destatis). It attributed the low rate to a decline in energy prices.

Yet every second German consumer ranks inflation as their number one economic worry, according to a joint study by researchers from University of Hohenheim and the bank ING-DiBa.

"A lot of people have the feeling that inflation is rising, when they see prices of products rise that they tend to pay for in cash, like for example bread rolls," said the chief economist of Dekabank, Ulrich Kater. If in compensation television sets are getting cheaper, that doesn't compensate for the "irritation at the increase in the price of small items."

The Hohenheim-ING-Diba study shows that 42 percent of more than 1,000 people interviewed believe that most prices are rising, 25 percent think some prices are rising, and 17 percent even think that all prices are rising.

Ironically, the European Central Bank is not worried about inflation in Europe or Germany - instead, it's worried that deflation could set in, and set off a period of economic stagnation similar to that of Japan after its real estate bubble popped in 1990.

A basket of six hundred goods and services is tracked by Germany's federal statistical agency to arrive at the consumer price index. Rent payments and energy costs are the two most important components of the basket, which also includes food items and entertainment expenses.

The wage issue

"For consumers, other products are often more important than those included in the official basket of goods for inflation rate calculation purposes - and naturally, consumers assign different weights to goods" as they form an overall sense of the direction of prices, according to Claudia Mast, a professor at Hohenheim who directed the research project.

Wages are expected to rise in Germany next year as a result of sectoral wage bargaining agreements, by about 3.1 percent on average across the economy, according to the Hans Böckler Foundation. That's well above the consumer price inflation rate, so in principle most German consumers should feel a little better off next year.

But nationwide averages are not the same as an individual consumer's experience, and when an important single item increases in cost - for example, if the rent rises or heating costs increase - the impression that makes on individual consumers forms their general impression of the direction of prices.

Moreover, according to Mast, the public's worries about future events influence their judgment as well. For example, many Germans worry that a future increase in inflation could result from the generous loans extended by the European Central Bank to the banking sector, or that big deficits being run by many European countries, could eventually result in high inflation.

"Those kinds of worries, or even fears, that are related to perceptions of possible future events, are projected back into the present. They intensify the feeling that at the end of the day, everything's getting more expensive," Mast said.

nz/hg (DPA, AFP)