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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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MONEY

Why large families are set to pay less for German care insurance

Germany's highest court has issued a landmark ruling stating that families with lots of children should ultimately pay less for their social security. Here's what you need to know.

Why large families are set to pay less for German care insurance

What’s going on? 

On Wednesday, the Constitutional Court in Karlsruhe ruled that parents with more than one child should pay a reduced rate of care insurance compared to people with fewer children – or those with none at all.

The case had been brought by 376 families in a campaign called Elternklage (Parents’ Complaint), who were supported by the Family Federation of Catholics in the Archdiocese of Freiburg. The families had argued that the amount of health insurance, pension insurance and care insurance they pay should be directly linked to the number of children they have.

Since raising a family costs time and money, this contribution to society should be taken into account when setting insurance rates and people with more children should pay lower contributions, the parents argued. 

What does the current law say? 

At present, Pflegeversicherung (care insurance) – a type of social security designed to fund care in old age – is already paid at different rates by parents and non-parents. Since the beginning of 2022, people without children pay 3.4 percent of their income towards social care, while parents pay 3.05 percent of their income.

The decision to have two different rates dates back to an earlier court ruling from 2001. At the time, the judges decided that charging people with children and those without the same amount of care insurance went against the Basic Law. This is because, in the view of the judge, parents pay a “generative contribution to the functioning of a pay-as-you-go social security system”, since their children pay back into the pot later in the life. The two-tiered system for people with and without children was adopted shortly afterwards.

At the same time, however, the judges ruled against a reduction in pension or health insurance contributions for parents. They said it was legitimate for the state to subsidise parents in other ways, such as through free education or topping up the pensions of people who had raised a family. 

READ ALSO: EXPLAINED: Who pays the most German tax and who benefits the most?

So if parents already pay less, what’s the problem?

According to the plaintiffs, the 2001 ruling made a false equivalence between small and large families and didn’t fully take into account the loss of income, time and cost associated with raising kids. 

The lawyers argued that the plaintiffs suffered a double loss of earnings when raising their children and looking after the older generation, and pointed to the fact that women’s pensions are often much lower than men due to time spent bringing up children.

The Catholic Family Federation also suggested that families didn’t really receive free healthcare for their children. That’s because the parents’ contributions are only assessed on their overall earnings, which means that the number of children they have and the costs associated with that aren’t taken into account.

READ ALSO: What you need to know about Germany’s new parental benefits reforms

The Constitutional Court in Karlsruhe.

The Constitutional Court in Karlsruhe. Photo: picture alliance/dpa | Uli Deck

And what were the counterarguments? 

Arguing against the constitutional complaint, a spokesperson for the Health Ministry said the costs associated with bringing up a child should be shouldered by society as a whole rather than any given insurance fund.

The National Association of Statutory Health Insurance Funds (GKV) pointed out that children may not necessarily grow up and pay into the same insurance pot that their parents’ did, making it hard to calculate parents’ contributions based on their children’s future ones. Some children may grow up and move abroad, which would mean they would pay into a different pension or health insurance fund entirely, they pointed out. 

The GKV advocated for reimbursing parents through child benefits rather than through reductions in insurance contributions. 

READ ALSO: What you need to know about the complicated world of German insurance

Did the judges agree with the plaintiffs? 

Partly – but only on the care insurance issue. According to the judges, the 2001 ruling didn’t go far enough in taking into account the number of children in a family. The more children a family has, the greater the effort and the associated costs for parents, they wrote in a statement announcing the ruling.

“This disadvantage occurs even from the second child,” the statement reads. “Charging the same contribution rate to parents regardless of the number of children they have is not constitutionally justified.” 

School pupils in a German classroom

School children sit in a classroom in Neckartailfingen, Baden-Württemberg. Photo: picture alliance/dpa | Marijan Murat

On health insurance and pensions, however, they disagreed with the plaintiffs. 

They said that time taken out by parents to look after children was already factored into the statutory pensions system and pointed to the fact that people benefit from free healthcare as a teenager and child as part of their parents’ health insurance plans. 

READ ALSO: Ehegattensplitting: How did Germany’s marriage tax law become so controversial?

What happens now? 

The court has given the government until July 31st 2023 to introduce a tapered system with larger discounts for larger families.

Speaking to RND on Wednesday, Health Minister Karl Lauterbach (SPD) said his ministry would implement the changes to the law within the agreed timeframe. He said officials would look closely at the reasoning for the ruling and see how it could be best applied to a new tariff system.

However, Lauterbach emphasised that the social care system still needed to be properly financed. “We also want to tackle that,” he said. 

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