Special effect drives inflation rate at the end of the year
After several declines, the inflation rate in Germany rose again slightly in December. Reason: in the comparative month of 2022, many Germans did not incur any heating costs. Over the year as a whole, the inflation rate was 5.9%.
After five consecutive declines, inflation in Germany rose again for the first time in December. Goods and services cost an average of 3.7 percent more than a year earlier, according to an initial estimate by the Federal Statistical Office. In November, the inflation rate had fallen to 3.2 percent, the lowest level for around two and a half years. Economists had expected an increase to 3.7 percent. At 5.9%, the inflation rate for 2023 as a whole was the second-highest level since reunification, surpassed only by the 6.9% achieved in 2022.
The reason for the increase at the end of the year is a special effect: in December 2022, the state took over the monthly advance payment for natural gas and district heating on a one-off basis in order to relieve households of energy costs, which had risen sharply following the Russian invasion of Ukraine. As a result, household energy in North Rhine-Westphalia, for example, became 5.6% more expensive this time compared to the previous year, with district heating in particular rising by 40%.
Food is still becoming significantly more expensive
"There is rarely such a large base effect," said Holger Schmieding, Chief Economist at Berenberg Bank. "Apart from special statistical effects, inflationary pressure is continuing to ease." Core inflation - which excludes energy and food prices - fell from 3.8 to 3.5 percent across Germany.
Food remained the price driver in December. They increased in price by an average of 4.5 percent (November: plus 5.5 percent). Energy cost 4.1 percent more than a year earlier (November: minus 4.5 percent). Services increased in price by 3.2 percent (November: plus 3.4 percent).
Downward trend "still intact"
In the months leading up to December 2023, the inflation rate fell continuously: from 4.5 percent in September to 3.8 percent in October and 3.2 percent in November. Despite the "turbulent ups and downs", the chief economist at the state-owned development bank KfW, Fritzi Köhler-Geib, called for calm: "The main reason for the rise in inflation lies in the past." The base effect makes today's energy prices appear higher in comparison, although they have fallen further in recent months.
Sebastian Dullien, Scientific Director of the Institute for Macroeconomics and Business Cycle Research (IMK) at the Hans Böckler Foundation, also emphasized that the December increase "should be seen as a temporary phenomenon". The downward trend in inflation is "still intact". This can also be seen in the decline in the so-called core rate, i.e. inflation excluding energy and food, and in the declining inflation rate for food.
The fight against inflation is likely to remain a tough affair in the new year, which is also due to several political decisions. For example, energy prices are likely to rise in January, as the CO2 price has risen from 30 euros per tonne to not just 40, but 45 euros. In addition, the price brake on gas and electricity expired at the turn of the year. Furthermore, gas and district heating customers are once again paying the full VAT rate of 19 percent instead of the reduced rate of 7 percent. It is also returning to the old level of 19 percent on food in restaurants. Deutsche Bank economists nevertheless expect the inflation rate to fall in 2024. It is expected to fall to 2.6 percent.
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Despite the decrease in energy costs due to government subsidies in December 2022, household energy and district heating costs still increased, contributing to the overall inflation rate. According to the Federal Statistical Office, food prices continued to rise, increasing by 4.5% in December compared to the previous year, further driving up the inflation rate.
Source: www.ntv.de
