Rate of 6.4 percent confirmed
Special effects cause inflation to rise
7/11/2023 8:54 am
High inflation has been a burden on people in Germany for months. According to provisional calculations, inflation picked up again more sharply in June after falling three times in a row and is now at 6.4 percent. Food prices continue to be a heavy burden (plus 13.7 percent). After all, the increase in this area has decreased slightly compared to May. The most important questions and answers.
Why did inflation rise again more sharply in June?
According to preliminary data from the Federal Statistical Office, consumer prices rose by 6.4 percent in June compared to the same month last year. In May, the annual inflation rate was still 6.1 percent. Economists attribute the higher pace primarily to a special effect. A year earlier, the 9-euro ticket for local transport, which was limited to three months, and the fuel discount temporarily dampened the rise in prices. This effect does not apply this year. “The June figures only interrupt the downward trend in inflation, but do not yet mark the end of it,” explained Commerzbank chief economist Joerg Kraemer. From the point of view of economists, people in Germany cannot expect a thorough relaxation in prices this year. They do not expect an annual average inflation rate of 2 percent in Germany until 2024.
How high is the price increase for food?
Food prices rose by 13.7 percent in June compared to the same month last year. After all, prices rose less than in May (14.9 percent). Consumers had to pay significantly more for dairy products (22.3 percent) and for sugar, jam, honey and other confectionery (19.4 percent) in June. Vegetables (18.8 percent) and bread and cereal products (18.3 percent) also became noticeably more expensive within a year.
Why has food become so expensive?
This is largely due to increased raw material and energy costs as a result of the Ukraine war. Farmers complained about higher costs: from energy to fodder to nitrogen fertilizer. “The higher level of costs is still a burden for us, even if we are no longer at the extreme level we were before,” said Farmers’ President Joachim Rukwied recently about the effects of the war on fertilizers and energy. Among other things, retailers also pointed out the high cost of energy and raw materials. If grain and energy prices rise, it becomes more expensive for bakers, for example, to produce bread and baked goods.
The extent to which higher costs can be passed on to consumers also depends on local competition. In some cases, increasing energy and raw material costs only reach the end customer with a delay. The opposite applies to falling costs. “Just as the price increases in the food supply chain only became noticeable in consumer prices with a time lag, the easing in producer prices will only gradually become visible in food sales prices,” said Franz-Martin Rausch, General Manager of the Food Trade Association, recently.
What role do food companies play?
The suspicion is repeatedly voiced that large food companies are using the high inflation to raise prices inappropriately. The boss of the retail giant Rewe, Lionel Souque, now sees a slight relaxation in the price war between trade and the food industry. It is true that manufacturers are now calling for price increases less frequently. Currently, however, hardly any manufacturer is willing to pass on falling raw material costs in the form of price reductions. “It doesn’t work that way, it still needs ‘education’,” Souque recently told the “Wirtschaftswoche”.
Why is calculating inflation important at all?
If prices rise sharply across the board for a longer period of time, people can afford less and less for their money and lose some of their savings. But permanently low or falling prices can also be dangerous. They can make businesses and consumers delay investing – and that can slow down the economy. The central banks are therefore watching closely how inflation is developing.
What can central banks do?
If necessary, the currency watchdogs take countermeasures, for example by lowering interest rates when inflation is weak or raising interest rates when consumer prices rise sharply. Higher interest rates make loans more expensive. This can slow down demand and counteract high inflation rates. The European Central Bank (ECB) sees price stability in the euro area in the medium term with an inflation rate of 2 percent. In June, inflation in the common currency area was significantly higher at 5.5 percent. “We will have to live with inflation rates that are too high for some time, that’s a tough road ahead,” said Bundesbank President Joachim Nagel recently. “Monetary policy must remain persistent.” The ECB has raised interest rates in the euro area eight times in a row in an unprecedented series.