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Eurozone: Falling prices in December – VP Bank column

According to a preliminary estimate, prices in the euro zone will decline by 0.3% year-on-year in December. There can be no talk of inflation in December either. The price trend is still in reverse. However, inflation data should be treated with caution at the moment.

The corona pandemic and the lockdowns that have been imposed lead to their own laws. In some segments, no price surveys are currently possible, simply because, for example, hotels or leisure facilities are closed. The statistical offices make do with price updates.

The informative value of the official price survey is also currently limited for the individual citizen. The Corona shopping cart looks different than the shopping cart under normal conditions. In the home office, spending on fuel is reduced to a minimum, but at the same time the home office may need better equipment. The expenditures for notebooks, monitors, keyboards or routers will therefore take up a higher proportion of the household budget than the official shopping cart actually provides.

However, the price development will experience spikes in the coming months. The time of falling prices is already over in January. In Germany, the VAT reduction expired in December. And yet another German price driver will have an impact on the rate of inflation in the currency area: The CO2 tax, which has been in force since January 1, has noticeably increased energy prices in the largest economy in the euro zone.

A base effect follows in the spring months. In the wake of the corona pandemic and the containment measures imposed, the oil price fell by more than 50% in March 2020. Since the low in April, Brent North Sea oil has already increased by almost three times. So if energy prices are compared with the previous year’s level from March onwards, this has a significant impact on the inflation rate. The rate of inflation will pick up noticeably.

The European Central Bank (ECB) is not happy about the expected price increase. These are statistical effects and not a sustained rise in inflation. For a sustained rise in prices, greater economic dynamism based on structural reforms is required. As long as this is not the case, inflation will lag behind the ECB’s targets.

Livestream on December 14th, 2020 from 6 p.m .:

With Hans-Werner Sinn, former President of the Ifo Institute.

With Hans-Werner Sinn, former President of the Ifo Institute: Corona and the miraculous increase in money in Europe
– Here is the stream! –

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