German inflation may be affected by tax changes to start the new year


The state readings earlier provided a glimpse of what to expect from the rest of German inflation data today, with there being an expected jump in annual inflation. Even the Saxony report reflected a bump in core inflation, though all of this may be a one-off.

Do be reminded that due to the virus crisis, German VAT was reduced from 19% to 16% for the standard rate and from 7% to 5% for the reduced rate through the period of 1 July to 31 December last year.

From 1 January, the rates will switch back to their regular and higher rates (h/t Richard Jones, Bloomberg). And that is likely the key factor driving the bump in price pressures.

When looking at it from this perspective, the nudge higher in German inflation this month should easily be overlooked and brushed aside by the ECB.