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ENERGY

Why everything is suddenly getting so expensive in Germany

The cost of living is increasing in Germany. We looked at some of the household items going up in price, and why that's happening.

A shopper holds a trolley at a Berlin supermarket.
A shopper holds a trolley at a Berlin supermarket. Photo: picture alliance/dpa | Fabian Sommer

Whether at the supermarket browsing fruit and veg or at the petrol station – you’ve probably noticed that things look pricier. And you’re not imagining it – life is noticeably more expensive in Germany compared to a year ago. 

The higher prices are due to a spike in inflation. According to preliminary data from the Federal Statistical Office, consumer prices rose by 4.1 per cent in September compared to the same month last year.

This was the first time in almost 28 years that inflation exceeded the four-percent mark in Germany. The last time the agency recorded these kinds of numbers was in December 1993, when inflation reached 4.3 per cent.

What does a higher inflation rate mean for me?

Higher inflation weakens the purchasing power of consumers because you can buy less for one euro than before. Rising inflation rates are also not good for savers who, for instance, park their money in low interest deposit accounts.

According to calculations by Commerzbank subsidiary Comdirect, saving accounts in Germany lost a total of around €47 billion in value in the first nine months because of low interest rates.

READ ALSO: German consumer prices rise to highest level in three decades

So why is inflation rising?

Inflation is currently being fuelled by several factors, first and foremost by eye-watering energy prices. 

“The inflationary effect is most obvious in the energy sector and therefore in gas and electricity prices,” Jörg Zeuner, chief economist at fund company Union Investment told German news site Focus Online. “In few other areas are supply and demand currently similarly disproportionate.”

It’s not just Germany that’s affected. According to a recent report by the policy forum the OECD, inflation has picked up around the world due to the higher costs of raw materials, problems with the supply of goods, stronger consumer demand as economies reopen, and prices bouncing back during the pandemic.

A car drives past a petrol station in Berlin.
A car drives past a petrol station in Berlin. Petrol prices are rising in Germany. Photo: picture alliance/dpa/dpa-Zentralbild | Monika Skolimowska

That essentially means that after the Covid lockdowns around the world, demand is booming, leading to shortages. The strong demand is therefore driving up crude oil and gas prices. Furthermore, the cold winter of 2020/21 has emptied stockpiles.

And let’s not forget the CO2 tax. Germany brought in a tax on carbon emissions at the beginning of 2021 aimed at making climate-friendly forms of energy more attractive. It is currently €25 per tonne of carbon dioxide, but is set to rise in the coming years. It pushes energy costs up for consumers, and is said to particularly affect low-income households. 

In September, consumers had to pay 14.3 per cent more for household energy and fuel than in the previous year. Experts believe the volatile prices will be temporary but no-one is sure how long they will go on for.

READ ALSO:

What else is more expensive?

Unfortunately other essential items are also increasing in price. 

Broadcaster WDR noted that groceries were 4.6 more expensive in Germany in August 2021 compared to the same month the previous year. This is a knock-on effect from higher energy costs. For example, truck drivers bring the food to the supermarkets and shops – and they need fuel for their vehicles. 

Here’s what’s become particularly expensive compared to a year ago according to data for August 2021 from the Federal Statistical Office.

Lettuce: up 34.5 percent 

Tomatoes: up 18.2 percent

Potatoes: up 16.3 percent

Eggs: up 12.1 percent

Bread loaves: up 10.8 percent

A shopper with vegetables. Many are getting more expensive in Germany.
A shopper with vegetables. Many are getting more expensive in Germany. Photo: picture alliance/dpa/dpa-tmn | Christin Klose

What else should we know about?

The end of Germany’s temporary VAT cut at the beginning of 2021 is also having an impact on rising prices. To try and get people in Germany spending again after the first Covid shutdown, the government temporarily reduced VAT from July 1st 2020 to December 31st 2020.

Since January 2021, regular VAT rates have been in force again, so that’s contributed to goods and services becoming more expensive compared to the previous year.

Will inflation continue to rise unchecked in Germany?

Inflation rates of up to five percent in Germany are considered possible this year. In the view of many economists, however, this is still a temporary phenomenon.

“As the Corona pandemic subsides in the spring and special factors such as the temporary reduction in value-added tax in Germany come to an end, inflation is likely to fall again,” said Commerzbank chief economist Jörg Krämer.

Germany is traditionally wary of inflation for historical reasons, reported AFP recently. Extreme hyper-inflation in the early 1920s devastated the economy and fuelled political instability in the fledgling Weimar Republic which preceded Nazi rule.

What’s the reaction?

Social associations and consumer protection organisations say that politicians have to relieve the burden of energy prices on citizens, particularly low-income households. If the rise in energy and petrol prices continues unchecked, a “dramatic social imbalance” will occur, warned Klaus Müller, head of the Federal Association of Consumer Centres, recently in the Tagesspiegel.

“Politicians have to urgently reduce the current dependence on energy imports, focus on energy savings and prevent energy poverty,” Müller said.

Meanwhile, so far the rise in the cost of living hasn’t been matched by equivalent rises in salaries, but,we could see higher wages soon.

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ENERGY

German households to receive relief for gas costs ‘starting in January’

To help German residents with skyrocketing energy costs, the government is planning to provide relief starting in January, according to draft legislation.

German households to receive relief for gas costs 'starting in January'

Through the gas price cap, the so-called Gaspreisbremse, both German residents and companies will receive retrospective relief for their gas costs starting in January 2023, according to the draft. 

Previously the relief payments were set to stretch between March 2023 and spring 2024, with 25,000 larger businesses, as well as almost 2,000 hospitals and schools to receive the help starting in January. 

READ ALSO: How much could households save under Germany’s new price cap?

The German government is reacting to the sharp rise in energy prices with energy price brakes worth billions and wants to soften the blow on both private households and companies. 

Germany will also be divvying out a one-off energy relief payment in December.

READ ALSO: When will people in Germany get their December gas bill payment?

How much will households and businesses receive?

Under the gas price cap, households and small and medium-sized enterprises are to receive a guaranteed gas gross price of 12 cents per kilowatt hour for 80 percent of their current consumption. For the remaining 20 percent of consumption, the contract price is set to apply.

For district heating, the guaranteed gross price is to be capped at 9.5 cents. 

Starting in January, a gas price brake is also planned for industry. These large consumers are to receive a guaranteed price of 7 cents per kilowatt hour net for 70 percent of their previous consumption volume.

The largest part of the energy price brake is to be financed by a “defence umbrella”, or special reserve, totalling up to €200 billion. The government is still taking on new debt in order to finance the energy caps. 

Russia’s war against Ukraine has increasingly aggravated the situation on the energy markets in Germany and Europe in the course of 2022, the draft states. 

In particular, the recent large price increases for natural gas and heat represent a “considerable, in some cases existence-threatening burden for residents and companies in Germany,” it continued. “They are an enormous socio-political and economic challenge.”

Vocabulary

relief – (die) Entlastung

Natural gas – (das) Erdgas

Consumption – (der) Verbrauch

cushion/soften a blow – abfedern

We’re aiming to help our readers improve their German by translating vocabulary from some of our news stories. Did you find this article useful? Let us know.

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