ifo Institute: Supermarkets Pass On the Reduction in VAT

German supermarkets have passed on almost all of the reduction in VAT as of July 1 to their customers. Prices fell by an average of 2 percent, finds an ifo Institute study covering 60,000 products in the online store of retail chain Rewe. For product groups where competition is stronger, the reduction in VAT caused greater price reductions than for product groups where competition is weaker, write the authors Clemens Fuest, Florian Neumeier, and Daniel Stöhlker in an essay for ifo Schnelldienst digital 13/2020.

“This is surprising, because studies of other temporary reductions in VAT show that these were passed on only partially and at a reducing rate over time,” the authors continue. It remains to be seen how prices will develop when VAT returns to its normal rate on January 1, 2021, they write. There is a possibility that prices will then rise more sharply than they had previously been cut; the authors note that this was the case with some temporary reductions in other countries.

Price data for the study was collected from Rewe’s online store automatically. In addition to the price, the dataset included the name of the product and the product group. The prices in the online store corresponded to the prices in supermarkets. Where supermarket prices varied across different markets, ifo used the lowest product price.