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Monthly Report: Consumer prices rising more strongly than expected

Consumer prices in Germany were up sharply at the start of the year, according to the Bundesbank’s current Monthly Report. The inflation rate as measured by the Harmonised Index of Consumer Prices (HICP) rose by 2.3 percentage points, climbing from -0.7% in December to 1.6% in January. This increase was thus significantly higher than had been expected by Bundesbank economists and market participants back in December. In their forecast, Bundesbank economists had projected that the inflation rate would reach a level of roughly 1% overall in the first half of 2021. The unexpectedly high January HICP inflation rate is primarily down to a statistical effect. One reason given for this is that the measures taken to contain the coronavirus pandemic caused a marked change in German households’ patterns of consumption in certain areas last year.

Less money for package holidays

The report states that there was, for example, a distinct drop in spending on package holidays, which were subject to particularly tight restrictions, as well as on clothing, restaurant visits and overnight stays in Germany. Consumption of fuels was also lower seeing as mobility was restricted, according to the report. On the other hand, households in Germany reportedly spent more money on food. These kinds of changes in consumption patterns are reflected in the HICP. If more money is spent on certain goods and services, they will be given higher weights in the index the next year, and vice versa. “The change in the HICP weights is essentially geared to the structure of consumption expenditure in the national accounts,” the economists write in summing up the methodology.

Statistical effect in case of package holidays

Seeing as people took far fewer package holidays, the package holiday weight in the HICP saw the most significant decrease of all components. This, in combination with the strongly fluctuating prices of package holidays and the special construction of the HICP, resulted in a statistical effect. According to the Monthly Report, this effect almost fully explains the unexpectedly high January rate compared with the December forecast and the gap between the HICP and the national consumer price index (CPI). Over the next few months, similar one-off effects are likely to also give rise to deviations from expected price developments. On an annual average, however, these effects are likely to balance out, which means that the forecast for the average inflation rate in 2021 ultimately remains unaffected by this.

More timely provision of data needed

A number of other euro area countries also saw an unexpectedly strong rise in the inflation rate in January. In those countries, too, this unexpected development does not seem to be caused primarily by general shifts in the structure of consumption, but instead by other one-off effects such as changes in seasonal sales activities or higher electricity costs. Since Eurostat did not publish all the updated HICP country weights for 2021 until 23 February, however, the calculations relating to the weighting effects in the euro area are still subject to a high level of uncertainty. In the Monthly Report, the Bundesbank economists therefore urge that current information on consumption patterns be provided by statistical offices in a more timely way in future. “This would be extremely helpful when it comes to identifying the underlying inflation trend.” Finally, once consumption patterns have potentially normalised, there are likely to be significant shifts in the HICP weights for several components in the coming year, too. “Should such adjustments to the weights lead to strong fluctuations of a purely statistical nature in the annual HICP rate, which is relevant to monetary policy, it would be a welcome step if statistical authorities could improve ways of communicating this in advance.”

The HICP was developed in the European Union to compare price changes from one country to the next and to compile an overall inflation rate for Europe and the euro area. The HICP for the euro area countries is used primarily by the European Central Bank (ECB) as a core indicator for assessing price stability in the euro area. The ECB aims to achieve an annual HICP inflation rate of below, but close to, 2% over the medium term. Germany’s HICP is compiled by the Federal Statistical Office.