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MONEY

How Germany’s soaring inflation is hitting household budgets

From paring back on meat products to filling the tank at certain times of day, high inflation can have a big impact on spending choices. Here are the everyday products in Germany that are seeing record price hikes right now.

How Germany's soaring inflation is hitting household budgets
A customer pays for groceries at a shop in Berlin Schöneberg. Photo: picture alliance/dpa | Christoph Soeder

What’s going on?

The cost of living has been rising steeply in Germany for several months, and the latest official inflation figures are the highest yet.

According to the Federal Office of Statistics (Destatis), consumer prices in May this year were a whopping 7.9 percent higher than they were in the same month last year.

This is a higher rate of inflation than at an other time since reunification. In fact, you’d have to look way back to 1973/74 – when the world was in the grip of a global oil crisis – to find price hikes as steep as this.

Once again, energy has a lot to do with the current crisis: as the world started to return to normal after the first waves of the Covid-19 pandemic, there were global supply issues with oil and natural gas, which drove up the price of energy significantly.

READ ALSO: German consumer prices climb again in May

Since Russia’s invasion of Ukraine in February, the situation has only got worse as Western countries scramble to reduce their dependency on fossil fuels from the aggressive superpower. 

This time, though, it’s not just about energy. Both Russia and Ukraine are major exporters of grain, which is unable to be delivered from Russia due to sanctions and unable to be delivered from Ukraine due to the fact that trade ports are currently blocked. 

This has created a double-whammy whereby numerous food products have shot up in price and other day-to-day products have become more expensive due to increased transport costs and the general costs of running a business. 

Which products have gone up the most in price? 

Though 7.9 percent is the average inflation rate, a wide range of popular everyday products have increased at a much faster rate over the past year. For most households, food has been one of the most noticeable ones. 

Sebastian Dullien, Scientific Director of the Macroeconomic Policy Institute (IMK) of the Hans Böckler Foundation, says that the shortage of grain supplies from Ukraine and Russia is having a knock-on effect on some numerous dietary staples. 

“This is now reflected in higher prices for products such as flour, pasta, but also eggs and meat, as a considerable part of the grain from Ukraine and Russia was used as animal feed,” said Dullien.

For everyday groceries as a whole, prices jumped up by more than 11 percent last month compared to May 2021. 

Chickens on a farm in Hannover

Chickens roam free on a farm in Hannover. Much of Germany’s grain supply is used as animal feed. Photo: picture alliance/dpa | Julian Stratenschulte

According to Destatis, however, this was only around half of the price increase that supermarkets faced in the same month: in May 2022, wholesale food suppliers were charging an average of 22.9 percent more than they were a year before. 

In April, producers of agricultural products had already hiked their prices by 39.9 percent compared to the previous year. 

Overall in the food category, butter saw the steepest jump in price with an increase of 43 percent against 2021, closely followed by cooking oils and fats, which increased by 38.7 percent, and flour and other cereal products, at 33 percent.  

Meat and dairy lovers have also been getting a shock at the supermarket lately: meat products jumped up by 16 percent last month, while dairy products and eggs went up by 13 percent.

With grain in short supply, bread has also jumped in price by around 10 percent year on year. 

READ ALSO: What to know about the latest price hikes in German supermarkets

What about energy prices?

There’s still no reprieve on this side either. 

In May 2022, people in Germany had to pay 38.3 percent more for energy than a year ago.

Heating oil was almost twice as expensive, while natural gas was around 55 percent more expensive and prices for fuel (41 percent) and electricity (21.5 percent) also increased significantly.

How long will this go on for?

Though everybody is hoping that the current inflation is just a short-term blip, experts say there’s unlikely to be any slowing of the price rises in the near future.

“Since there are no signs of an easing in prices for energy and food on the world market so far, inflation in Germany is also likely to remain high in the coming months at least until the end of the year,” said Dullien. 

Agriculture Minister Cem Özdemir (Greens) also believes that prices will continue to rise in the coming months, with the potential for even steeper increases in the cooler months. 

Cem Özdemir

Agriculture Minister Cem Özdemir (Greens) speaks at a press conference on June 7th. Photo: picture alliance/dpa | Fabian Sommer

“A lot of things are unfortunately yet to come,” Özdemir told the Rheinische Post. “We have to expect increases in autumn and winter because retailers now have to stock up on expensive energy and the price increases will be passed on to customers.”

Nevertheless, the government has been attempting to soften the blow of the rising prices a little for consumers.

Two packages of energy relief measures have so far been agreed by the governing coalition, including a budget transport ticket, an increase in the commuter allowance, a fuel tax cut and other one-off lump sums for benefits claimants and employees. 

Özdemir has also proposed that the government lower the VAT on certain food products to help out struggling households.

“Logic, simplicity and sustainability are the keywords here,” he said. “That’s where you quickly end up with my proposal.”

READ ALSO: 

Member comments

  1. Inflation is literally caused buy governments printing money. The government alone are pretty much entirely responsible for inflation. Their policies have caused this. Not war or corona. Its not hit its worst yet. Unfortunately Germany have to also worry about ECB so the Next few years are really going to test the Euro. Has anyone got any D-marks left?

    But I bet our beloved traffic light can borrow thier way out of it….

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MONEY

Who benefits most under Germany’s tax relief plans?

German Finance Minister Christian Lindner says he wants to give taxpayers relief worth €10 billion in the face of rising inflation. But there is already pushback, with some saying high earners will benefit the most.

Who benefits most under Germany's tax relief plans?

What’s happening?

As Germany battles rising inflation, Finance Minister Christian Lindner has revealed a plan to give residents tax relief worth more than €10 billion in total. 

“Employees and low-income earners, pensioners and self-employed, students with taxable part-time jobs and, above all, families will benefit,” the FDP politician wrote in a guest article for German daily FAZ on Wednesday.

As well as an adjustment of the benchmarks in the income tax scale, child benefit and child allowance are also to be increased.

READ ALSO: How the German Finance Minister wants to ease inflation with tax relief measures

According to sources in the Finance Ministry, the so-called ‘Inflation Compensation Act’ provides for child benefits to be increased in two stages and also to be standardised. Under the plans, the first, second and third child will each receive €227 per month next year. From the fourth child onwards, €250 will be added. In 2024, the rates for the first to third child are to be raised again – to €233.

At the same time, Lindner’s draft provides for an increase in the basic tax-free amount, i.e. the income up to which no tax has to be paid. The Finance Minister wants to raise this limit from the current €10,347 to €10,632 in the coming year and €10,932 in 2024.

Finance Minister Christian Lindner speaks at a press conference in Berlin.

Finance Minister Christian Lindner speaks at a press conference in Berlin. Photo: picture alliance/dpa | Kay Nietfeld

READ ALSO: Germany pledges inflation relief tax package worth €10 billion

Other key values of the tax scale will also be shifted to compensate for the effect of so-called ‘cold progression’. This is the term used to describe a kind of creeping tax rise when salary increases are eaten up by inflation but still lead to higher taxation. People are then hit with higher taxes, although purchasing power does not increase at all in real terms.

“A tax system that also imposes higher taxes on people who are already suffering from high prices is not fair,” Lindner wrote in FAZ. Eliminating this is “not a patronising act, but is called for in several respects”. Lindner says his plans would benefit 48 million taxpayers.

Who would benefit most?

In order to mitigate the effect, the top tax rate, which currently starts at an income of €58,597, will only apply at a level of €61,972 in 2023, and €63,521 one year later.

However, the tax threshold for very high incomes will remain in place. The income limit of €277,826, on which the so-called wealth tax rate of 45 percent is charged, will not be changed.

But there is already widespread criticism of the plans because in absolute terms, top earners would benefit more from Lindner’s tax cuts than low earners.

The FDP’s coalition partners – the Greens – said they considered the plans to be socially unbalanced.

“High and highest income groups would receive more than three times as much as people with low incomes, who actually need the relief most urgently,” said Greens parliamentary group vice-president Andreas Audretsch. Furthermore, people with very low incomes would not get any relief at all because they pay no income tax below the basic tax-free amount.

Katharina Beck, the Greens’ spokesperson for financial policy, expressed similar views. “The other way round would be right: strong shoulders should bear more than low-income shoulders and not be disproportionately relieved,” she told the Redaktionsnetzwerk Deutschland (RND) on Wednesday.

Lindner’s plans have a greater impact on low incomes in percentage terms, but in absolute terms people with high incomes benefit more.

For example, a taxpayer with a taxable income of €20,000 is to be relieved by around €115 per year under the current plans. With an income of €60,000, the relief amounts to €471, according to figures from the Ministry of Finance. 

What’s the reaction elsewhere?

Vice-chairman of the SPD parliamentary group, Achim Post, said the relief doesn’t go far enough.

“The proposed increases in the basic tax-free allowance and child benefit are a step in the right direction, but they are not enough,” he said. 

He suggested direct payments as an alternative, which could provide targeted relief to people with small and medium incomes. 

A woman holds cash in her hand.

A woman holds cash in her hand. Photo: picture alliance/dpa | Daniel Karmann

‘Falls short’

Meanwhile, the German Trade Union Confederation (DGB) rejected the proposals. Lindner’s tax plan “falls far too short”, said DGB Executive Board member Stefan Körzell.

For the relief for people with small and medium incomes, the basic tax-free amount would have to rise to €12,800, said Körzell, adding: “Instead, top earners and the rich benefit, although they have far fewer problems coping with the current price increases.”

Körzell said that “top earners and the wealthy must contribute more to tax revenue”.

He said the FDP politician’s plans would cause “serious revenue shortfalls” for the treasury.

FDP Secretary General Bijan Djir-Sarai rejected the criticism as baseless. The adjustment is aimed at smaller and medium incomes and reduces “the tax burden of the hard-working middle”, he said.

For top earners, the relief amount is capped, he said. “The relief is fair and necessary so that people benefit from a wage or salary increase despite the high inflation and do not have to pay on top through a higher tax burden,” Djir-Sarai said.

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