- Augustrhythm of price increase diminishes to 1.9%.
The price increase in Germany has taken a significant downturn. In August, consumer prices were 1.9% more expensive than the previous year, as per the Federal Statistical Office. Notably, energy prices dropped compared to a year ago, while prices for services climbed above average.
The strain on consumers is easing. In July, a rise in consumer prices was recorded at 2.3%, following 2.2% in June and 2.4% in May. However, in August, prices fell by 0.1% compared to July. The core inflation rate, excluding energy and food, decreased by 0.1 percentage points to 2.8%.
Economists had predicted a shift towards steady prices during the summer. The Munich-based Ifo Institute anticipates an inflation rate less than 2% in Germany for the upcoming months, based on a survey of companies' price plans.
Consumer expenditure hasn't picked up yet, despite wage increases. Many individuals are still saving. According to the Federal Statistical Office, private consumption decreased by 0.2% in the second quarter compared to the previous quarter. Moreover, consumer sentiment dimmed in August, as shown by the consumer climate study by the Nuremberg-based institutes GfK and NIM. Expectations regarding income and the economy, as well as the desire to shop, have decreased, while the tendency to save has increased.
In the long term, consumers' purchasing power has dropped due to the inflation wave. Although the average household income grew by 5.1% from 2022 to 2023, the inflation rate was 5.9%. Inflation picked up pace rapidly after the Russian attack on Ukraine at the beginning of 2022, primarily due to the surge in energy prices.
However, German workers have mostly compensated for the loss in purchasing power during the high-inflation period. In the second quarter, wage increases surpassed the rise in consumer prices for the fifth consecutive time. The Federal Statistical Office estimates the real wage increase for the second quarter at 3.1%.
Given the strong wage increases, private consumption remains the main hope for the German economy, which contracted by 0.1% in the second quarter. Economists expect little improvement in the second half of the year. The German Federal Bank expects only minimal growth of 0.3% for the current year.
The inflation wave has left its mark. Although the extremely high inflation rates of the past two years are history, leading economic research institutes expect a significant slowdown in inflation in Germany to 2.3% in the annual average - after 5.9% in 2023.
However, consumers still feel the significantly increased prices when shopping or dining out. Food prices have increased by an average of more than 30% over the past four years, according to a special evaluation by the Federal Statistical Office for the period from January 2020 to May 2024.
The Federal Association of Consumer Centres even believes that food prices are mysterious, as stated by the association's president, Ramona Pop. She demands a new observation point at the Federal Agency for Agriculture and Food, which should analyze prices and costs of food at the respective production and trading levels.
If inflation in Germany and the eurozone as a whole decreases over the course of the year, this would provide the European Central Bank with the opportunity to reduce interest rates. In June, it lowered interest rates for the first time since the inflation wave by 0.25 percentage points. In July, the ECB kept interest rates stable and left the door open for a rate cut at the council meeting on September 12. Market expectations in September are for an ECB rate cut. However, inflation in the eurozone remained stubbornly high: in July, the rate rose slightly to 2.6%.
In principle, the ECB considers an inflation rate of 2.0% to be consistent with price stability. Lower rates or even falling consumer prices (deflation) pose the risk that companies and consumers will postpone their investments and purchases because they expect even lower prices, which would have negative consequences for economic growth.
Destatis Notification Real Wages Q2/2024
The decrease in August's consumer prices might be relieving for some, as it means a lower [Price] to pay for goods and services. With the core inflation rate decreasing as well, it could potentially lead to a reduction in overall living expenses.
Despite the recent drop in consumer prices, food prices have still seen an alarming [Price] increase of over 30% over the past four years, according to the Federal Statistical Office.
