Ifo: Decline in inflation likely to stall

Economic scenario - Ifo: Prices on the Rise Again, Despite Inflation Decrease

The Munich-based research institute Ifo predicts that the recent slowdown in consumer price growth might not last forever. The number of businesses in Germany intending to hike their prices within the forthcoming months is increasing once more, according to the researchers.

Ifo's price predictions climbed to 19.7 points in December from 18.1 points in November. In August, expectations reached a brief low, with a balance of 14.5 points.

Experts anticipate higher prices in the consumer-oriented service sectors, specifically the dining establishments. The institution reported that restaurateurs are particularly planning to lift their prices significantly. This market sector's balance rose from 45.9 to 87.6 points. The transition back to the standard value-added tax rate for food on January 1 may be a factor in this. Nonetheless, retailers are also increasingly planning to raise their prices again.

The points in the price expectations represent the percentage of firms planning to increase their prices overall. The balance is determined by subtracting the percentage of companies wanting to boost their prices from the percentage planning to lower theirs.

Lower energy costs had caused the inflation rate in November to reach its lowest level since June 2021. Consumer prices were 3.2% higher than in the same month the year before. According to many economists, inflation could top 4 percent in December. Last year, the state paid for the discount for gas and district heating clients during December as a one-time measure. This effect no longer applies this year.

Additional Insights:

1. Several German industries, such as those in consumer-oriented service sectors like dining establishments, plan to increase their prices due to various factors, including the return of the normal VAT rate for food on January 1.
2. The Ifo economic research institute in Munich anticipates a resurgence of price expectations among businesses in Germany, contributing to the likely stall in the decline of inflation.
3. While inflation briefly dipped to 14.5 points in August, experts predict a rebound to around 4 percent in December, influenced by rising price expectations and other factors.
4. The Ifo experts forecast higher prices in the service sectors, with restaurateurs specifically planning significant price hikes, potentially impacting German consumers' purchasing power.
5. The current economic situation, as indicated by the Ifo's price expectations, shows that, despite a potential decline in inflation, companies remain focused on managing their financial situations, with some planning to adjust their prices to recover from economic challenges.
6. The prospect of a stalled decline in inflation may not be as beneficial for German consumers as initially thought, as many companies look to offset their own economic struggles through price adjustments.

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The planned price increases by German companies in specific sectors are influencing the stalled decrease in inflation in several ways, as reported by the Ifo economic research institute:

1. Manufacturing Sector: While fewer manufacturers in Germany have intentions to raise their prices, the overall price expectations have decreased, with the figure falling to 6.6 points in January, down from 6.9 points in December. This is largely due to energy-intensive industrial sectors adjusting their prices downward.
2. Construction Sector: In contrast, the construction sector has experienced an increase in price expectations, rising to 0.5 points in January, up from -0.9 points in December. This suggests that more construction companies are planning to boost their prices rather than reduce them.
3. Consumer-Related Service Providers: A significant rise in price expectations can be observed among consumer-related service providers, with the balance soaring to 27.5 points in January, up from 19.9 points in December. This trend is most compelling in sectors like hotels, travel agencies, and service providers in the arts, entertainment, and recreation industries, which are looking to lift their prices.
4. Retail Sector: Retailers are also planning to boost their prices more frequently, reaching 30.2 points in January, up from 28.5 points in December. Sellers of toys, clothing, flowers, and stationery are particularly endeavoring to raise their prices.
5. Overall Impact: Despite these diverse industry trends, the overall inflation rate in Germany is projected to remain above the European Central Bank's target of 2%. The ifo price expectations stand at 19.6 points in January, indicating that, even though there's some easing of price pressures, particularly in the manufacturing sector, the overall inflationary pressures remain.

In summary, while there are contradictory trends within various sectors, the overall trend suggests that the planned price increases by consumer-related service providers and retailers are contributing to the stalled decline in inflation, with the inflation rate predicted to remain above 2% in the upcoming months.