The ongoing inflation in Germany
In May this year, the inflation rate in Germany had reached its highest level since the upward price trend in 2022 amounting to 7.9 % compared to the same period last year. This was also the highest level in almost 50 years. The consumer price index has slightly weakened since to 7.6 % in June and July, likely dampened by the recent government measures, such as the discount on fuel and 9€-travel-ticket for public transport, but it remains at a high level well above 7 %.
The Euro-Zone saw an 8,6 % average price increase in June, but in some euro countries, inflation rates of above 20% were recorded, the highest being Estonia (22.0%), Lithuania (20.5%) and Latvia (19.2%).
At the same time, the inflation in the U.S. was 9,1%, but over there, price growths were caused by buoyant demand, which is a healthy economic reaction.
In Europe, where demand did not change, consumer price increases were driven by the strong increase in energy prices, which rose by 42 per cent compared to the same month last year leading to higher production costs. But also supply disruptions of wheat and other foods affect the strong price growth on foods, in particular.
On average, food and luxury goods are 8.2 % more expensive than a year ago, other goods 4.3% and services 3.4%.
However, looking at individual business sectors or products and services, rates of nearly 20% can be observed. Prices for new residential construction, for instance were 17.6 % higher in May than a year ago and the new construction prices for office buildings were even 19.0 % higher (this was the highest increase since 1970 according to the Federal Statistical Office.
As a countermeasure for the ongoing inflation, the ECB has raised its base rate for the first time in 11 years this month by 0.5 percentage point to 0% following the steps taken earlier by the Fed and other central banks, which raised their rates by higher percentage points (0.5 – 0.75). The ECB is expected to perform a further rate increase in September, possibly of another half a point.
The impact on private households, labour market
Other than food prices and the extraordinary high construction prices, the services sector is where price growths have been very persistent.
What has not yet been noticeable that much is the financial burden on private households, who can expect high additional payments in 2023 for heating, electricity, and hot water costs as these did not yet get passed on to the consumers.
The recent price developments and the emerging trends are leading to significantly lower real wages. An increasing pressure for wage increases can already be observed in the labour market.
The outlook on inflation, economy
For the year 2022, the EU Commission forecasts increase rates of 7.9 % in Germany in 2022 and 4.8% in 2023. For the eurozone, it expects inflation to slow down for the remaining year after its peak at 8.6% in June and then cool down to 4.6% in 2023.
The latest interest rate increase by the ECB currently only means that the banks can deposit their money for free instead of having to pay for it. In the medium to long term, the banks' interest rates for loans and deposits will also rise.
The downturn to the Central Bank´s new monetary policy is that it bears the risk of economic recession. By making money more expensive and incentivising its storage, investment activity and purchases of long-term goods will suffer.
According to many economists, not all price increases have yet been passed on to consumers and many expect inflation rates to peak in September, but it all depends on how supply, gas supply, in particular, will develop.
Recent surveys already reveal a higher saving behaviour of German citizens. Several experts point to the actual tendency of Germany entering a cycle of stagflation, where economic recession is combined with an upward price development, and which is difficult to control with monetary policy.
Lars Feld, a professor of economic policy and adviser to Christian Lindner, said at a news conference in Berlin, that Germany would already face a high risk of stagflation.
In its latest forecast, the International Monetary Fund expects the German economy to shrink to around 2% in 2022 from 2.9% in the previous year and only to slightly grow just above 2% in 2023.
In comparison, the global economy is expected to grow by 3.2% in 2022 and by 2.9% in the following year. In 2021, it had grown by 6.1% catching up on the 3.1% shrinkage in 2020 due to the pandemic.