Consumers caught in a price trap? Inflation is only falling slowly

Questions and answers - Consumers caught in a price trap? Inflation is only falling slowly

Life in Germany became significantly more expensive again last year. Although the general inflation rate has come a long way from the 8.7 percent at the start of 2023. However, consumers still have to dig deeper into their pockets than a year ago, especially for food.

Today, the Federal Statistical Office is publishing initial figures on the development of the inflation rate in Germany in December and on average for 2023 as a whole. Economists are expecting a figure of around six percent for the year as a whole. In 2022, the annual average inflation rate of 6.9% was the highest since reunification.

What has driven inflation?

After the Russian attack on Ukraine in February 2022, energy and food in particular skyrocketed in price. Inflation seemed to have only one direction: upwards. Most recently, the inflation rate fell for five months in a row. According to the Federal Office, many energy products in particular were cheaper in October and November 2023 than a year earlier. The rise in food prices slowed, but was still significantly higher than overall inflation.

To what extent is the state providing relief?

The German government has tried to cushion the impact of higher costs on consumers and companies by putting the brakes on electricity and gas prices. The price brakes for electricity and gas were introduced in March 2023 and also applied retroactively for January and February. The plan was to extend them until the end of March 2024, but the Federal Constitutional Court's budget ruling on November 15 put a spanner in the works: the price brakes therefore expired at the end of 2023.

"In the meantime, electricity and gas tariffs are available again throughout Germany that are significantly higher than before the crisis, but mostly below the upper limits we set for the price brakes and also noticeably below the prices last fall and winter," argued Federal Chancellor Olaf Scholz (SPD) at the end of November. "We have also filled our gas storage facilities so well that we do not expect any sudden price jumps."

Until the end of 2024, employers can pay their employees up to an additional 3,000 euros free of tax and social security contributions as an inflation compensation bonus to help with generally higher prices.

What's next for inflation?

Economists assume that inflation will continue to fall both in Germany and in the eurozone as a whole. For Germany, for example, the German Council of Economic Experts ("Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung") expects an average inflation rate of 2.6% for 2024. The Ifo Institute expects an average of 2.2% this year.

The Bundesbank assumes that the harmonized consumer price index (HICP), which the European Central Bank (ECB) uses for its monetary policy, will fall to 2.7% for Germany in 2024. "Energy prices are falling sharply and food prices are also declining significantly," predicted the Bundesbank in mid-December. The ECB's monetary policy is also having an increasing effect.

What is the European Central Bank doing?

The monetary authorities changed course in summer 2022 in order to get high inflation under control: Zero and negative interest rates were abolished, and since then the ECB has raised key interest rates in the eurozone ten times in a row. Higher interest rates make loans more expensive, which can curb demand and counteract high inflation rates. The ECB is aiming for stable prices with inflation of 2.0% in the medium term for the currency area of 20 countries. The ECB Governing Council left interest rates unchanged at its meetings in October and December. The key interest rate at which banks can obtain fresh money from the central bank is currently 4.5 percent. If banks park money with the ECB, they receive 4.0 percent interest on these deposits.

What does high inflation mean for my savings?

Thanks to the rise in key interest rates, interest rates on overnight and fixed-term deposits are also higher again. However, the return is not always higher than inflation. The real interest rate, i.e. the interest on savings deposits after deducting the inflation rate, is often still negative.

Are rising wages fueling inflation again?

That is quite possible. The need to catch up is immense, says Thorsten Schulten, Head of the Wage Archive of the Economic and Social Science Institute (WSI) of the trade union Hans Böckler Foundation: After three years of real wage losses, purchasing power is currently at the same level as in 2016.

Accordingly, double-digit percentages in the unions' wage demands are not uncommon. There are still inflation risks, Ifo President Clemens Fuest recently warned: "These are primarily the current sharp rise in wages, which is leading to higher prices, especially for services."