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German inflation slows but energy price pressure remains

Inflation in Germany slowed slightly in July, but was kept high by energy prices which have soared since the Russian invasion of Ukraine, official data showed on Thursday.

Consumer prices rose by 7.5 percent year-on-year in July, according to the federal statistics agency Destatis, fractionally lower than the 7.6 percent recorded in June.

Energy prices had a “considerable impact on the high inflation rate”, Destatis said in a statement.

The cost of energy was 35.7 percent higher in July this year than in 2021, the statistics body said, with prices taking off since the outbreak of the conflict in Ukraine.

The rising cost of food and supply chain disruptions also added to the price pressures.

Inflation hit a post-reunification high of 7.9 percent in May, but has slowed over the last two months, thanks to government interventions to ease the pressure on consumers, including discounted train travel and a fuel tax cut.

The inflation rate was “likely to increase again after the summer” as the relief measures fall away at the end of August, said Fritzi Koehler-Geib, chief economist at the public lender KfW.

Likewise, “from October onwards the strongly increased gas prices can be passed on directly to the end-customers” as Berlin intervenes to save struggling energy companies, Koehler-Geib said.

Russia this week again reduced the flow of gas to Germany via the Nord Stream pipeline to 20 percent of its normal capacity.

The “risk of a complete gas supply freeze” in retaliation for the West’s support of Ukraine hung “like the sword of Damocles” over the economy in the coming months, Koehler-Geib said.

A total end to supplies would likely send prices up further and heap more pressure on consumers.

It would take “until 2023” for inflation to come off the boil and start coming down towards the two-percent rate targeted by the European Central Bank, said Carsten Brzeski, head of macro at the ING bank.

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