- Inflation rises again - up 2.3 percent in July
Inflation in Germany is rising again slightly. In July, consumer prices were 2.3 percent higher than the previous year's level, as reported by the Federal Statistical Office. This initially ends the trend of gradually falling inflation rates: In June, statisticians recorded an increase in consumer prices of 2.2 percent after 2.4 percent in May.
In June, falling energy prices and only moderate increases in food prices had dampened inflation in Germany. However, services became significantly more expensive, which was noticeable in the catering industry or car workshops, among others. In the services sector, recent higher wage agreements by trade unions are making an impact. Rents also continued to rise in June.
Given the strong wage increases, private consumption remains the most important beacon of hope for the ailing German economy, which surprisingly shrank by 0.1 percent in the second quarter. Other sentiment indicators suggest little momentum for the second half of the year, according to economist Marc Schattenberg of Deutsche Bank Research. "Therefore, it will be crucial how private consumption develops given the real income gains."
Economists had recently expected a trend towards stable prices in the summer. A survey by the Ifo Institute among companies about their price plans showed that price increases are less frequently planned in consumption-related areas.
Inflation rate is falling slowly - but price level remains higher than before
Although the extremely high inflation rates of the past two years are a thing of the past, leading economic research institutes expect a clear slowdown in inflation in Germany to 2.3 percent - after 5.9 percent in 2023. However, the decline has been slow recently. Economists pointed to rising wages, which can lead to price increases by companies.
Consumers still feel the significantly increased price level when shopping or dining out. Food prices have increased by more than 30 percent on average over the past few years, according to a special evaluation by the Federal Statistical Office for the period from January 2020 to May 2024.
Inflation wave after Ukraine war burdens households
In the long term, the purchasing power of consumers has decreased due to the immense inflation of recent years. Although the average household income increased by 5.1 percent from 2022 to 2023, the inflation rate was 5.9 percent. After the Russian attack on Ukraine at the beginning of 2022, inflation accelerated rapidly because energy and, consequently, production and imported goods became much more expensive.
Falling inflation gives ECB room to maneuver
If inflation in Germany and the eurozone as a whole falls over the course of the year, this would give the European Central Bank (ECB) room to maneuver for further interest rate cuts. In June, it cut interest rates for the first time since the inflation wave by 0.25 percentage points. In July, the central bank left interest rates unchanged and kept the door open for a further interest rate cut at its mid-September meeting.
In principle, the ECB sees price stability ensured with an inflation rate of 2.0 percent. Lower rates or even falling consumer prices (deflation) carry 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.
Higher inflation rates, conversely, weaken the purchasing power of consumers. This slows down private consumption, which is a key pillar of the German economy. Trade unions are attempting to offset price increases with high wage agreements. Recently, pensions have also risen significantly: The benefits for more than 21 million pensioners in Germany were increased by 4.57 percent as of July 1st.
The European Union might express concern over the persisting high inflation rates in Germany, affecting consumer purchasing power and economic growth. The European Central Bank (ECB), monitoring the eurozone inflation, could use the falling inflation trends as an opportunity for potential interest rate adjustments, aiming to support economic growth without causing deflation.
