German consumer prices down 0.6 percent on year in July; 1st fall since 1987

German consumer prices fall in July

BERLIN — Consumer prices in Germany, Europe’s biggest economy, posted their first annual decline in 22 years this month largely as a result of lower oil prices, preliminary government data showed Wednesday.

Prices were down 0.6 percent on the year in July — the first fall since March 1987, when they declined by 0.3 percent, the Federal Statistical Office said.

It said the decline was fueled by sharp year-on-year declines in energy and fuel prices, which peaked in July 2008.

Germany’s inflation rate hit zero in May and edged up to 0.1 percent last month. Several other European Union nations have reported a fall in prices this year.

Disinflation, or moderately falling prices, is also a sign of the slack economic growth and demand for products as a result of the recession. The European Central Bank has slashed interest rates and pumped fresh credit into the banking system in an effort to prop up demand.

The EU’s statistics agency has said that plunging oil prices sent inflation in the 16-nation euro zone as a whole into negative territory in June, with consumer prices sinking by 0.1 percent on the year.

As for Germany, economists at Commerzbank in Frankfurt noted that “the currently strong influence of energy and food prices obscures the fact that core inflation has hardly changed in the past months.”

“Due to the considerable slack in the economy, core inflation will likely move slightly lower, but deflation — i.e. lastingly falling prices on a broad front — is not on the cards,” they wrote in a research note.

Prices can fall for a short time without harming the economy, but full-scale deflation can result in a vicious circle of declining demand, worsening debt and job losses, as happened during the Great Depression of the 1930s.

With the year-on-year effect from falling oil prices set to fade away and retail prices likely to stabilize, there should be “a return clearly above zero already toward the end of this year” in the inflation rate, said Alexander Koch, an economist at UniCredit in Munich.

German consumer prices were down 0.1 percent on the month in July, Wednesday’s report showed.

The figures were based on data from six of Germany’s 16 states. Final figures are due Aug. 11, but they rarely deviate from the initial estimate.