Higher heating bills and rising food prices: Inflation has hit a new high. As the Federal Statistical Office is now reporting, this will only change slowly.
According to experts, after inflation jumped to its highest level in almost 30 years, people in Germany cannot initially hope for a quick relaxation. On average over the past year, consumer prices have increased by 3.1 percent. The Federal Statistical Office confirmed an initial estimate on Wednesday. A stronger increase in annual inflation was last measured in 1993 at 4.5 percent. In the Corona crisis year 2020 it was 0.5 percent. In view of delivery bottlenecks and comparatively high energy prices, many economists are again expecting an average of 3 before the decimal point this year.
Higher inflation weakens the purchasing power of consumers because they can then buy less for one euro than before. Higher inflation is also gnawing at savings that bear meager interest. According to a YouGov survey commissioned by Postbank, one in nine Germans can barely pay for their living expenses. “Since food, energy and fuel have become significantly more expensive, but incomes cannot keep up with price developments, the financial scope is shrinking,” explained Postbank chief economist Marco Bargel.
According to the Federal Office, consumer prices rose by 5.3 percent in December compared to the same month last year. The inflation rate measured monthly thus reached the highest level of the past year. “This means that the peak of German inflation should now have been passed,” said Sebastian Dullien, scientific director of the Institute for Macroeconomics and Business Cycle Research, which is close to the union. Compared to the previous month, prices increased by 0.5 percent.
Inflation in Europe: Mainly driven by energy prices
Inflation in Europe’s largest economy was fueled above all by the rapid rise in energy prices as part of the global economic recovery after the Corona crisis in 2020. Energy products rose in price by an average of 10.4 percent compared to the previous year, after a decline of 4.8 percent in the year 2020. Consumers had to dig deeper into their pockets, especially for heating oil (41.8 percent) and motor fuels (22.6 percent).
Added to this was the withdrawal of the temporary reduction in VAT, supply bottlenecks and the introduction of the CO2 tax at the beginning of 2021 of 25 euros per tonne of carbon dioxide produced when diesel, petrol, heating oil and natural gas are burned.
Even if the VAT effect does not apply this year, many economists do not initially expect a rapid relaxation. Among other things, they refer to supply bottlenecks that increase production costs. The price curve for crude oil has also recently shown a steep upward trend.
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Only slowly improvement in sight
“Inflation will drop only slowly over the course of this year,” said Ifo economics expert Timo Wollmershäuser. According to the economic research institute, the companies pass on the increased costs for energy and for the procurement of preliminary products and merchandise. Even if the rise in energy prices does not continue in the coming months, this will ensure high inflation rates for a while. So far, however, Wollmershäuser has not seen any signs of a dangerous spiral of rising prices and rising wages.
The new President of the Bundesbank, Joachim Nagel, is concerned about the rise in inflation. He sees “the danger that the inflation rate could remain higher for longer than currently expected,” said Nagel recently. “Despite all the uncertainty, one thing is very clear: if price stability requires it, the ECB Governing Council must act and adjust its monetary policy course.” Nagel is a member of the highest decision-making body of the European Central Bank.
Inflation is an important indicator for the monetary policy of the European monetary authorities. The central bank is aiming for an annual inflation rate of 2 percent and is at least temporarily willing to accept a moderate overshoot or undershoot. Critics accuse the ECB of fueling inflation with its ultra-loose monetary policy, which it actually wants to keep in check.
Rate hike not planned for the time being
Unlike in the USA, there is no prospect of an interest rate hike in the euro area. ECB Director Isabel Schnabel recently warned against rapid increases. In the forecasts, inflation will even fall below 2 percent in the medium term, the economist recently told the “Süddeutsche Zeitung”. “That’s why we mustn’t raise interest rates too early. That could result in the recovery being stalled.” However, the monetary watchdogs would react quickly and decisively if they came to the conclusion that inflation could remain above 2 percent after all.
Economics Monika Schnitzer does not see the ECB under any pressure to end its zero interest rate policy. “In the medium term, it is not assumed that prices will continue to rise. That depends very much on wages. What will the wage increases be like? And so far we have seen a very moderate development,” said Schnitzer on Bavarian radio.