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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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MONEY

Where in Germany do people have the highest disposable income?

An economic study has shown huge regional differences in income throughout Germany. So which parts of the country have the most to spend each month, and which are feeling the squeeze?

Where in Germany do people have the highest disposable income?

A study by the Economic and Social Sciences Institute (WSI) of the Hans-Böckler foundation reveals stark regional differences in disposable income in Germany. In some cases, households had as much as double the spending money of those in other parts of the country. 

Here’s where people have the most – and least – disposable income each month.

What is disposable income?

The WSI calculated disposable income as the sum of income from wealth and employment, minus social contributions, income taxes, property taxes and other direct benefits or taxes.

What’s left is the income which private households can either spend on consumer goods or save.

The study, which was based on the most recent available national accounts data for 2019, looked at the disposable income of all of the 401 counties, districts and cities across Germany.

Which regions have the highest and lowest disposable incomes?

The study found that the regions with the highest disposable incomes were in the southern states.

Heilbronn in Baden-Württemberg had the highest disposable income of all 401 German counties and independent cities – with an average per capita disposable income of €42,275. The district of Starnberg in Bayern followed in second place with €38,509.

READ ALSO: REVEALED: How much do employees really earn across Germany’s states?

By comparison, per capita incomes in the cities of Gelsenkirchen and Duisburg in North Rhine-Westphalia were less than half as high, at €17,015 and €17,741 respectively. These regions had the lowest disposable income in the country. 

The study also found that, more than thirty years since German reunification, the eastern regions continue to lag behind those in the west in terms of wages.

According to the WSI, the Potsdam-Mittelmark district is the only district in the former east where the disposable per capita income of €24,127 exceeds the national average of €23,706.

Do regional price differences balance things out?

The study also showed that regionally different price levels contribute to a certain levelling out of disposable incomes, as regions with high incomes also tend to have higher rents and other living costs.

“People then have more money in their wallets, but they cannot afford more to the same extent,” WSI scientist Toralf Pusch explained.

READ ALSO: EXPLAINED: When will Germany raise the minimum wage?

Therefore, incomes in the eastern states, adjusted for purchasing power, are generally somewhat higher than the per capita amounts would suggest.

That could explain why, even after price adjustment, the cities of Gelsenkirchen and Duisburg in western Germany continue to be at the very bottom of the list.

Saxon-Anhalt’s Halle an der Saale, on the other hand, which has an average disposable income of only €18,527, benefits from the lower prices in the east.

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