DB Research Starts Tricks On German Inflation

Thursday, November 24, 2005

Germany seems to be very scared that the ECB will raise rates in order to get the leading overnight rate closer to inflation, now running at 2.3% in Germany. A research piece by Deutsche Bank Research provocatively asks whether inflation is really that high and starts playing tricks beyond those that are already applied to the basket of goods that is the foundation of the calculation of consumer prices. The non-driving consumer will benefit the German economy; except maybe the automakers.

German consumer prices

GRAPH: Inflation for non-users of energy does not look that bad. Who can show me a human that does not consume energy. Source: Deutsche Bundesbank
Take out energy and see inflation come down to 1.4%. Take out tobacco and vehicle tax and - wonder over wonder - that dreaded higher price level every citizen feels in his thinner wallet after negligible pay rises in the last years comes down to a mere 0.9%, DB Research says. Taking out food won't help much in Germany as food prices are among the lowest in the Eurozone.
As DB Research finds that higher consumer prices are also attributable to administered prices like fees for government services it of course makes sense to exclude them from a pro-company inflation rate. Large-size German companies have successfully pressured local governments into a tax-competitive downward spiral. Because of community taxes a lot of the financial industry works in Frankfurt but pays taxes in Eschborn (you don't want to work there.) Frankfurt meanwhile sits on empty coffers with a mile of nicely renovated museums but no money for more than just mediocre exhibitions.
This leads me to the question why the EU calculates the HICP (Harmonized Index of Consumer Prices) when there seems to be a gap in the approach towards the economy and the people.
The dreaded concept of core inflation which stands in stark contrast to the present "necessinflation" (inflation is low but all things we buy become more expensive) has arrived at least in the bank towers in Frankfurt/Main. Let us hope it stays there and never arrives in Kaiserstrasse, the seat of the ECB. In a country with a healthy savings quota despite record unemployment interest rates below the inflation rate will lead to a move of capital elsewhere when the gap becomes unbearable. I have to add that I favor the political concept of raising purchasing power in order to get the economy going and not a VAT hike plus corporate tax exemptions that put the lower income classes at the biggest disadvantage. One should not forget that the lower income classes are the fastest growing segment in the European population.

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