Friday, October 26, 2007

Weak Consumer Confidence Threatens German Inflation Rate

source: Price fears hit German optimism
Fear of inflation, combined with global increases in food prices, threatens to chill German consumer confidence, according to surveys late last week. Germans ‘inclination to buy’ is slowing in response to uncertain expectations about their incomes in the near future. The Nuremberg-based GfK consumer research organization expects that the consumer climate index will fall next month to its lowest level since April, when the country was adjusting to a three-percentage point increase in value added tax. Additionally, data shows that inflation is on the rise. Four federal states reported larger-than-expected price increases in October. These reports led analysts to predict German-wide figures to remain at 2.4%, the highest in two years.
Bild, the German mass market newspaper, attacked comments by Bundesbank president Axel Weber, who, earlier this week, predicted that German inflation may reach as high as 3%. Since the European Central Bank aims to keep inflation at 2%, the newspaper said that Weber’s comments created an “inflation alarm” to already nervous consumers. His comments raised similar concerns in Frankfurt, creating the impression that the central bank has lost control of inflation and that Weber’s comments may prove to be self fulfilling.

Consumer experience purchasing day-to-day goods, such as food, largely shape their impressions about the inflation rate. Butter prices have risen as much as 40% over the last year, cucumbers as much as 42% in the month of October alone. With no immediate relief in sight to the sharp increase in the cost of food, inflation rates are particularly susceptible to the uneasy consumer. However, as economist Jorg Kramer points out, food accounts for only about 10% of the goods used to calculate the German inflation rate. The main cause of higher inflation, he says, continues to be the charges imposed by the government, including the 3% increase in value added tax earlier this year. This tension between consumer expectations and realities creates serious difficulties for policy makers.

Questions for Discussion
1. Are consumer impressions likely to have as dramatic of an effect on the inflation rate as Weber warned?

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