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Germany Inflation Highest Since 2008, Unemployment Declines Sharply

germany may25 29jul21 lt

Germany's inflation accelerated in July to the highest level since 2008, mainly due to the base effect, flash data from Destatis revealed on Thursday.

Separate official data showed that the unemployment declined more-than-expected in July as employers hired more staff following the easing of COVID-19 restrictions.

Inflation based on the harmonized index of consumer prices, which is meant for EU comparison, advanced to 3.1 percent from 2.1 percent in June. This was the highest since 2008 and well above economists' forecast of 2.9 percent.

Harmonized inflation has stayed above 2 percent since April 2021.

On July 8, the European Central Bank adopted a symmetric 2 percent inflation target that will allow a temporary overshoot in inflation.

Consumer price inflation accelerated to 3.8 percent in July from 2.3 percent in June. Economists had forecast the rate to rise moderately to 3.3 percent.

The increase in inflation was caused by a base effect, as the value-added tax rates were temporarily reduced in July 2020 on account of the coronavirus crisis.

Higher producer prices on the back of supply chain disruptions, higher commodity prices and the gradual reopening of the economy are all impacting consumer prices,
Carsten Brzeski, an ING economist, said. Together with the reversal of the German VAT rate, headline inflation could even exceed 4 percent towards the end of the year.

Ralph Solveen, an economist at Commerzbank said, at the beginning of next year, the inflation rate will fall again, at least due to the elimination of the VAT effect.

Solveen expects the problems in the supply chains to be gradually overcome around the turn of the year and demand to normalize. This should also slow the rise in goods prices.

On a monthly basis, consumer prices grew 0.9 percent, much faster than the expected rate of 0.5 percent. Final results for July will be published on August 11.

Month-on-month, the HICP gained 0.5 percent, in line with expectations but above 0.4 percent rise in June.

Elsewhere, the number of people out of work decreased 91,000 from June, when it was down by 39,000, the Federal Labor Agency reported Thursday. Economists had forecast a moderate fall of 28,000.

The unemployment rate fell to 5.7 percent in July from 5.9 percent in June. The rate was forecast to fall marginally to 5.8 percent.

The situation on the labor market continues to improve, said Federal Employment Agency CEO Detlef Scheele.

Unemployment and underemployment continued to fall sharply despite the start of the summer break, Scheele noted. Employment growth continues and companies are increasingly looking for new staff.

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