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Five ways Germany’s soaring inflation could affect your life

The cost of living has been sky-rocketing in Germany over the past few months - and experts believe this trend could be set to continue. But what impact could this have on your everyday life and future plans?

Euro note in shape of house
A euro note shaped into a house. Photo: picture alliance/dpa/pixabay/moerschy | pixabay/moerschy

According to the latest figures released by the Hans Böckler Stiftung, inflation soared to an unbelievable 7.4 percent in Germany in April, outstripping all previous estimates and hitting a high not seen in four decades. The year before, it had been less than half that figure at 3.1 percent, and in 2020, it was a mere 0.5 percent.

So, aside from the fact that everything seems eye-wateringly expensive all of a sudden, what does this high inflation rate really mean for people’s livelihoods, debts and savings? Here are a few things you may notice. 

1. You have less spare cash 

This may seem like an obvious one, but inflation is all about the cost of living – and high inflation essentially means that everyday things are going to get a lot more expensive. To determine how much prices are going up, economists compile a massive hypothetical basket of goods that reflects the everyday goods and services that consumers have to pay for in their day-to-day lives. This could include the cost of transport like train tickets or renting a car, housing costs and bills, food and drink or consumer products like electronics, toiletries or clothes.

The average increase in prices in the basket is used to determine the rate of inflation – in other words, how much more an average person will have to spend to maintain the same standard of living or buy the same things. At the current rate of inflation, someone will generally be paying 7.4 percent more for the same goods and services in April 2022 as in April 2021. That means that a set of items that cost an average of €100 last year will now cost an average of €107.40. (If you want to get a sense of how much things could cost in five years at the current rate of inflation, this depressing calculator will help you do just that). Since you’re unlikely to earn €7.40 more for every €100 you earn, you end up becoming poorer in real terms over time. 

READ ALSO: The products getting more expensive and harder to find in Germany

Of course, inflation can impact people slightly differently depending on what items they buy more and less of. For example, a car driver will have to pay significantly more for fuel in 2022 than in 2021, but for public transport users, the cost of a train ticket has actually gone down slightly (and will go down even more in summer). Relying on fossil fuel energy sources exclusively for heating and electricity would have also made things a lot pricier this year, while people with heat pumps or eco-friendly electricity contracts should be much less affected. 

Despite the lifestyle differences that can impact how much more you’re spending, the bottom line is simple: most people will end up having less disposable income as a result of high inflation, with lower earners taking the hardest hit. 

2. You pay more for housing

As The Local has been reporting, an ever increasing number of tenants are signing up for what’s known as an Indexmiete, or index rent, which essentially means that rents rise each year in line with inflation. With the current soaring inflation rates, this means that a certain group of renters could see significant increases in their rent.

Others may notice their rental costs rising for a different reason once they get their annual utilities bill and are asked to pay any additional money they owe to the landlord. Since energy costs have risen at such an alarming rate this year, it’s likely that most estimates of bills based on last year’s prices will fall well short of what’s actually owed, which could lead to nasty shocks and a big adjustment of the ‘warm rent’ (rent and additional costs) for next year. 

READ ALSO: EXPLAINED: Why tenants in Germany could see bigger rent increases this year

“Anyone who does not increase their advance payment for ancillary costs will face high additional charges next year,” Rolf Buch, CEO of letting agent Vonovia, said in a recent interview with Focus. “For some tenants, this could amount to up to two months’ rent.”

Of course, home owners aren’t exempt from hefty bills – but they do get some consolation. High inflation has been linked to an increase in property places, partly because prices are rising in general and party because buying property is a way to avoid the value of savings getting eroded – which brings us to our next point…

3. Your savings aren’t worth as much

Germany is a nation of savers – and placing cash in a bank account is by far their favourite way to do it. At the end of 2020, Germans held a whopping €2.8 trillion in bank accounts, with much of the money they saved in lockdown year being stashed away at their bank. 

This may sound great on paper, but unfortunately, high inflation and rock-bottom interest rates tend to mean that the money in these accounts is actually losing value the longer it sits there. Think of it like putting a five euro note under your pillow for ten years. If nobody adds to that five euros, you’re not going to be able to buy as much with it when you take it out compared to when you put it under there. 

Woman withdraws cash

A woman withdraws cash from her bank account. Photo: picture alliance/dpa/dpa-Zentralbild | Fernando Gutierrez-Juarez

Essentially, inflation rates at 7.4 percent, you’d have to find a savings account that could give you at least 7.5 percent interest to stop you losing money. Sadly, interest rates are actually hovering below one percent on most ordinary savings accounts or bank accounts these days.

Unsurprisingly, this can make it increasingly hard to people to save for their old age and retirement – though it’s always an option to put your money in investments rather than savings accounts to try and get a better return. 

READ ALSO: How to protect your savings against inflation in Germany

4. … and nor are your debts 

On the flip side of seeing savings get eroded, people with debts will essentially see the amount they owe go down as well – especially if the interest rate they’re paying on their loan or mortgage is less than the rate inflation. 

Essentially, as buying power gets eroded, the debt is worth less over time – which is why even after 25 years of paying interest on a mortgage, you may only really be paying the equivalent of what you borrowed to start with, or even a bit less. 

It’s this that has made getting on the property ladder such an attractive prospect for people in Germany in recent months, since interest rates are low and inflation is high. However, this trend has sparked a wave of borrowing which some worry could became unsustainable if interest rates were to rise even a little bit. If this happens, Germany’s booming property market could prove to be a bubble. 

READ ALSO: German central bank could intervene over rising house prices

5. Travelling gets more expensive

If you have savings in another country or need to convert money to travel abroad, you have noticed that inflation isn’t good for exchange rates. In fact, inflation tends to devalue a currency by reducing its purchasing power over time. Of course, the high interest rates in Germany wouldn’t be solely responsible for this – you’ll need to look at the figure for the Eurozone as a whole.

Various foreign currencies lie on a table

Various foreign currencies lie on a table. Photo: picture alliance/dpa | Sven Hoppe

Currently, the euro has sunk to a low against the British pound not seen since July 2016, and it continues to fall in value against the dollar. 

Of course, this is great news if you’re earning money in another currency that’s strong at the moment or if you have savings in that currency that you want to conver into euros. On the flip side, it’s not great news for travelling abroad or trying to converting euros into another currency. 

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WORKING IN GERMANY

What employees in Germany need to know about Weihnachtsgeld

When winter rolls around, many workers in Germany can look forward to a special Christmas bonus from their employer. But who's entitled to it - and how much should it be? Here's everything you need to know about 'Weihnachtsgeld'.

What employees in Germany need to know about Weihnachtsgeld

OK, so what’s Weihnachtsgeld?

Weihnachtsgeld – or Christmas money – is an annual bonus that gets paid out to employees each winter. In Germany, it’s one of the most popular ways to reward and compensate employees, and around 55 percent of German workers receive it on top of their salary each year.

It was originally designed to help employees cover the additional costs of buying Christmas gifts, but these days bosses use it as a way to motivate employees throughout the year, or simply as an additional perk of the job. 

The likelihood of getting Weihnachtsgeld depends on the type of contract you’re on, the region you live in and even your gender. In western German states, around 59 percent of employees get a Christmas bonus, while just 39 percent of employees in former East German states are lucky enough to get a payout. Similarly, while 57 percent of men receive Weihnachtsgeld, just 51 percent of women do. 

People with long-term contracts are also more likely to be treated to some extra spending money at Christmas: 56 percent of permanent employees get Weihnachtsgeld in Germany, while just 45 of those on short-term contracts do. 

As an alternative to Weihnachtsgeld, employers may choose to pay what’s known as Urlaubsgeld – or holiday pay. This is sometimes paid out along with the salary when the employee takes annual leave, or at another set time of year. 

READ ALSO: Explained: How to apply for Germany’s new ‘opportunity card’ and other visas for job seekers

I didn’t get a bonus this year – am I entitled to one?

You may well be – but the legal situation is a little complicated. Essentially, German labour laws don’t mandate that employees have a right to receive Weihnachtsgeld, but in some cases you could still be entitled to it.

The most common ways that workers can claim a Christmas bonus are as follows:

  • Through a collective agreement negotiated by your trade union
  • Through a company agreement between the workers’ council and employer 
  • If entitlement to a bonus is written in your contract 
  • If your employer has repeatedly given Christmas bonuses in the past 

According to German law, when an employer pays Weihnachtsgeld for at least three years in a row, the entitlement to an annual bonus is considered an unwritten part of the contract. That means that if your boss usually pays out an annual bonus and suddenly decides not to, you may still have a claim to the additional cash. 

Another important thing to note is that employees should be treated equally when it comes to any Christmas bonus payouts. In other words, an employee can’t be excluded from recieving Weihnachtsgeld unless there is a legally valid reason for doing so. 

If your contract or a collective agreement entitles you to Weihnachtsgeld, it’s important to check the terms and conditions carefully. That’s because some companies may require you to continue working there for a set period of time after recieving your bonus – so leaving before a set date could cause you to lose your entitlement to the money. 

READ ALSO: Why German employers will soon have to record staff working hours

How much should Weihnachtsgeld be? 

The amount of Weihnachtsgeld employees can get isn’t defined by law, but it’s often calculated as a proportion of an employees’ salary and may also relate to the amount of time you’ve spent at the company.

According to Federal Office of Statistics, workers in Germany who have a collective agreement will receive €2,747 for their Christmas bonus this year on average – 2.6 percent higher than the average payout last year. 

Frankfurt Christmas shopping

A man carries a wrapped present through the centre of Frankfurt. Photo: picture alliance/dpa | Frank Rumpenhorst

However, there are significant differences between different industry sectors. At a time when fossil fuel prices are soaring, workers in the crude oil and natural gas sector have enjoyed the highest bonuses of around €5,504 on average, followed those in the petroleum and coking sector who netted an average bonus of €5,450. On the other end of the scale, employees who work in recruitment got an average of just €327 on top of their usual salaries. 

Collective agreements negotiated by trade unions will often lay out what percentage of an employee’s salary should be paid as a bonus at different stages of their employment. In most cases, employees who’ve been at a company for six months will get 25 percent on top of their normal monthly salary, which is increased to 35 percent after a year, to 45 percent after two years and to 55 percent after three.

READ ALSO: Jobs in Germany: Should foreign workers join a union?

When can people expect their bonus?

Different companies may choose to do things in different ways, but traditionally Weihnachtsgeld is paid out at the end of November along with your salary.

This is to ensure that people can use the extra cash to start buying Christmas presents and enjoying the festive season in December. 

Is there anything else I should know?

It’s important to remember that Weihnachtsgeld counts as taxable income, so you should see all the usual reductions for income tax and social contributions on your payslip along with details of the bonus. 

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