Euro Watch

Criticized for increasing the value-added-tax, up from 16 percent to 19 percent, Germany seemed on Tuesday to have made the right decision when inflation was reported to have risen less than had been anticipated. Inflation was at 1.8 percent in January, up from 1.4 percent in December. It was feared that inflation in Germany would grow by 1.4 percent due to the higher VAT, but it appeared that it was up by 0.7 percent. The VAT was increased in order to try to help out state and federal finances in Germany and to cut the amount that employers and employees must contribute to unemployment insurance.

It was feared, however, that the higher VAT could push inflation higher in February and March when anecdotal evidence implied that some German shops were hesitant to pass the full VAT increase on to consumers. It was also pointed out that it was difficult to gauge the full impact of the VAT increase due to the difficulty of figuring out how much price rises had been affected by declines in the price of oil and how much of the price rises could be attributed to the VAT.

The less vigorous rise in German inflation was said to mean that new Eurozone inflation figures, due on Wednesday, could show region-wide inflation unchanged at 1.9 percent in January, right on the European Central Bank target of an annual rate that was below but close to 2 percent.

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