Inflation at record levels: Where else are prices going?

Created: 03/30/2022, 15:12

Prices have risen, especially for food and energy.

Inflation has risen sharply in recent months.

© Rolf Poss/Imago Images

Life in Germany has become noticeably more expensive.

An end to the price increases is not in sight for the time being.

Politicians and the central bank are trying to counteract this.

Frankfurt/Main - Six percent?

Seven percent?

Germany's consumers are concerned about inflation trends.

The Ukraine war* continues to heat up energy prices, which were already the main drivers of inflation.

In March, the annual rate of inflation climbed to 7.3 percent, as the Federal Statistical Office * announced on Wednesday based on an initial estimate.

This is the highest level in reunified Germany, and even in the history of the Federal Republic you have to go back to autumn 1981 to find similarly high inflation rates.

At that time, mineral oil prices had risen sharply as a result of the First Gulf War.

How much have consumer prices risen before?

Hopes of falling inflation rates after the turn of the year were only fulfilled for a short time.

After falling to 4.9 percent in January, inflation in Germany rose above the five percent mark again in February 2022: consumer prices were 5.1 percent higher than in the same month last year.

So now 7.3 percent inflation in March, with energy 39.5 percent more expensive than a year earlier.

It is not only the tense situation on the world market that is driving prices, but also the German CO2 tax*: since the beginning of the year, 30 euros per tonne of carbon dioxide produced when diesel, petrol, heating oil and natural gas are burned have been due.

What are the future prospects?

According to economists, consumers in Germany must be prepared for further price increases.

In February, producer prices for industrial products were 25.9 percent above the level of the same month last year.

Many products could therefore become even more expensive for consumers because companies react to higher purchase prices, for example for raw materials, with a price premium.

According to a recent survey by the Ifo Institute*, more and more companies are planning price increases in the next three months.

"Due to the surge in energy prices due to the war, the rise in consumer prices should increase noticeably again, especially in the short term," said Bundesbank President Joachim Nagel recently.

The banking association BdB expects inflation rates of more than seven percent in the coming months.

"We are also expecting prices to rise significantly over the next few years," said BdB General Manager Christian Ossig.

The Ifo Institute is forecasting an inflation rate of up to 6.1 percent for 2022 as a whole.

That would be the highest inflation in Germany since reunification in 1990.

The German Council of Economic Experts also expects 6.1 percent inflation in Germany this year.

"The great dependency on Russian energy supplies harbors the considerable risk of lower economic output and higher inflation," explained the "economic wise men" in their forecast presented on Wednesday.

What does this mean for consumers?

Higher inflation rates reduce the purchasing power of consumers because they can then afford less for one euro.

Above all, when goods that are bought frequently become more expensive, people notice this in their wallets: when filling up with gas, in the supermarket.

In addition: In the years 2020 and 2021, which were shaped by the Corona* pandemic, Germany’s employees had to accept real wage losses.

Last year, the strong increase in gross wages of just under 3.1 percent was more than completely eaten up by consumer prices, which rose by a good 3.1 percent.

No real wage gains are to be expected for the current year due to the even more rapid increase in inflation.

What is the state doing to relieve consumers?

The federal government put together another package last week to relieve people in the face of the sharp rise in energy and fuel prices.

This includes a three-month reduction in energy tax, which is intended to make a liter of petrol 30 cents and diesel 14 cents cheaper.

In addition, employees receive a one-time energy subsidy of 300 euros on their gross salary and families receive a 100 euro bonus per child on the child allowance.

According to estimates by the Federal Ministry of Finance, the total costs for the state will approach the 16 billion euros that the first relief package from February included.

Is inflation only so high in Germany?

In the euro area as a whole, energy prices in particular are driving inflation.

In February, at 5.9 percent, it reached the highest level in the currency area since the euro was introduced as a settlement currency in 1999. In the USA, consumer prices rose by almost 8 percent in February compared to the previous year, which was the highest value there in 40 years.

Britain is experiencing its steepest rise in consumer prices since 1992.

Has the European Central Bank reacted?

In view of persistently high inflation, the ECB is pushing to normalize its monetary policy, which has been ultra-loose for years.

Europe's currency watchdogs are expecting an inflation rate of 5.1 percent for the euro area in the current year.

The central bank is aiming for stable prices with two percent annual inflation.

Critics have long accused the ECB of fueling inflation with its flood of cheap money.

On March 10, the ECB decided to scale back the purchase of additional government and corporate bonds until mid-2022.

"If the net purchases end in the third quarter as currently planned, that opens up the possibility of raising key interest rates this year if necessary," said Bundesbank President Nagel a few days after the decision by the ECB Council, of which he is a member.

The currency watchdogs are making sure that there is no dangerous wage-price spiral.

If wages rise too much in response to the current high level of inflation, this could push prices even higher as companies use higher wages as a justification for further price hikes.

Wages and prices then push each other up, and inflation could remain at a high level for a long time.

So far, however, the ECB sees no signs of such a development.