German Inflation Affected By VAT

Feb. 27, 2007
VAT increases to 19% but slowing oil prices kept inflation moderate.

A sharp increase in sales tax and slowing oil prices had mixed effects on headline inflation in Germany this month, regional consumer price data from the eurozone's biggest economy showed on Feb. 27. In the western state of North Rhine-Westphalia, Germany's most populous state, the consumer price index (CPI) rose by 1.6% on a 12-month basis in February, only fractionally faster than the 1.5% recorded in January, the regional statistics office in Duesseldorf said.

That was because lower oil prices took the sting out of a sharp rise in value-added tax (VAT) that came into effect at the beginning of the year, the office said. VAT was increased by three full percentage points to 19% with effect from January 1, in a move which many experts projected would push up headline inflation not only in Germany but in the euro area as a whole.

Inflation also picked up slightly in the eastern state of Brandenburg, where the cost of living rose by 1.9% on a 12-month basis this month compared with 1.8% in January.

In two other key regional states, however, inflation slowed this month. In the eastern state of Saxony, the cost of living rose by 2.3% on a 12-month basis in February, down from 2.4% in January. And in the central state of Hesse, the 12-month rate of inflation slowed to 1.8% in February from 2% in January.

In January, pan-German inflation had stood at 1.6%, comfortably below the level of 2% that the European Central Bank sees as a ceiling for inflation in the 13 countries that share the euro.

Copyright Agence France-Presse, 2007

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