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COST OF LIVING

Has Germany’s sky-high inflation finally peaked?

The cost of living in Germany has risen rapidly in recent months, with inflation reaching a 70-year high of 10.4 percent in October. But experts now say signs could be pointing to a trend reversal in the new year. Here's what you need to know.

Has Germany's sky-high inflation finally peaked?
A woman buys groceries in a German supermarket. Photo: picture alliance/dpa | Hauke-Christian Dittrich

What’s going on?

Everywhere you look in Germany, prices seem to be going up. From hefty back payments on energy bills to huge markups on groceries, the cost of living is much higher than it was a year ago – and it’s affecting almost all areas of life. 

In October, Germany’s inflation rate hit 10.4 percent against the year before, representing the largest jump in consumer prices since 1951. Prices have been rising steeply for almost two years now, triggered by supply bottlenecks during the Covid pandemic and the soaring cost of fossil fuels following Russia’s invasion of Ukraine.

According to the Federal Office of Statistics (Destatis), household energy bills had gone up by 55 percent in October compared to last year, while groceries had gone up by 20 percent and clothes and footwear were up 5.5 percent. 

READ ALSO: EXPLAINED: 10 ways to save money on your groceries in Germany

All of this has had a huge impact on our behaviour and, in many cases, our standard of living. In fact, a recent survey conducted by EY found that one in two people were only buying life’s necessities at the moment.

Fortunately, a trend reversal could be in sight. According to economists, the stars are aligning for a dampening of inflation in the coming months – and the question isn’t so much if, but when. 

How do they know inflation is set to go down?

According to the experts, there are a number of factors pointing to a levelling out of consumer prices. The first is that producer prices dropped significantly last month.

Producer prices refer to the costs that domestic producers like farmers and manufacturers charge to wholesalers and retailers. In this sense, they have a big impact on the prices that we pay at the till – though there’s usually a lag between producers setting the prices and retailers passing them on to consumers. 

Earlier this week, Destatis revealed that producer prices had gone down by 4.2 percent in October compared to the previous month. This makes October the first month since 2020 when producer prices haven’t gone up.

According to Ralph Solveen, economist at Commerzbank, the latest producer prices “give hope that the peak of the inflation rate for consumer prices is no longer far away either”. 

Jens-Oliver Niklasch from the Landesback Baden-Württemberg also sees the change in producer prices as a good sign. “This is perhaps the first signal of a certain easing of price pressure due to the economic situation,” he told Tagesschau.

Another positive sign can be seen in wholesaler prices, which slipped by 0.6 percent in October. Destatis believes this is largely due a five percent reduction in the cost of petroleum products.

Aral petrol station prices

The prices for petrol and diesel are displayed on a sign outside an Aral petrol station on November 21st. Photo: picture alliance/dpa | Hauke-Christian Dittrich

Moreover, a recession appears to be in the cards this winter. The Organisation of Industrialised Countries (OECD), for example, forecasts a decline in German economic output of 0.3 per cent for 2023. According to the International Monetary Fund (IMF), this could apply to large parts of the global economy next year.

One of the consequences of economic recession is that people cut back on spending, which often leads to a dampening of prices. That could have a knock-on effect on the inflation rate in 2023. 

READ ALSO: Fact check: Is Germany heading into a recession next year?

How much could inflation go down by?

There are numerous different estimates on this, with by far the most heartening was put forward by economist Olivier Blanchard. Talking to Manager Magazin this week, the former IMF chief economist said he expected inflation to drop dramatically next year.

“My guess is that by the end of 2023 the inflation rate will be 2.5 to 3 percent,” he said. 

The steep decline could be influenced by the government interventions like the planned cap on gas and electricity prices. This is set to come into force in March 2023 and retroactively relieve both households and small businesses from January.

With high inflation largely driven by energy costs, this kind of assistance could be critical in helping to drive down prices. 

READ ALSO:

So, should we popping champagne corks?

Well, depending on the price of champagne at your local supermarket, a mid-range Sekt may be a more appropriate choice. 

That’s because there’s still a fair amount of disagreement about how much inflation is set to go down by, and when. Though producer and wholesaler prices are falling, consumers won’t feel the impact of this – or any of the government aid – for some time yet. And experts say there are still too many uncertainties to know what the future holds.

Grocery shopping at Frankfurt market

An elderly couple purchase groceries at a market in Frankfurt. It could take a while for wholesale price drops to be passed on to consumers. Photo: picture alliance/dpa | Boris Roessler

Pointing to recent agreements between trade unions and employers, Commerzbank’s Ralph Solveen said higher wages could still push up inflation for a little while yet. “With a strong increase in wages, companies are facing additional costs, which they will at least partly pass on to their customers,” he said. 

Joachim Nagel, President of the Deutsche Bundesbank, also believes inflation hasn’t quite reached its peak.  “I think it is likely that the annual average in 2023 will have a seven before the decimal point,” he told Tagesschau. 

Is the European Central Bank doing anything to combat the price hikes?

Yes. Within just three months leading up to November, the ECB raised interest rates by a full two percent – and further interest rate hikes look likely in December.

Economists polled by Reuters believe the ECB is likely to raise rates by 0.5 percentage points at its meeting next month. Currently, the key interest rate stands at 2.0 percent.

Raising interest rates is a standard way for central banks to try and get a grip on out-of-control inflation, though there are some downsides to it, such as an increase in borrowing costs. In Germany, for example, rising interest rates are already being felt in a decline in property purchases as people struggle to afford financing for a new home. 

However, most experts – including Nagel – say rate rises remain an important tool in the battle against the soaring cost of living.

READ ALSO: How the housing bubble in Frankfurt and Munich could be set to burst

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For members

ENERGY

REVEALED: Germany’s planned hardship fund to help with energy bills

The gas and electricity price caps are coming, and the government wants to pay people's energy bills in December - but will that be enough to stop people falling into hardship? Germany's Economics Ministry thinks it won't be and has drafted plans for a new hardship fund. Here's what you need to know.

REVEALED: Germany's planned hardship fund to help with energy bills

When Germany’s traffic light coalition parties – the SPD, Greens and FDP – took office last December, they had no idea that they would be facing an energy crisis on such a major scale.

But with Russia’s invasion of Ukraine sending the gas market into turmoil, the coalition’s big plans have been put on the backburner as they work out how best to support people with rising costs. 

Under the latest set of energy relief measures put forward by the Gas Price Commission, the government will shoulder the cost of people’s energy bills this December. It also plans to introduce a cap on both electricity and gas prices, which will come into force next March and be backdated to January.

READ ALSO: Germany plans to cap energy prices from start of 2023

This multi-billion relief package is likely to soften the blow for many households, but according to a new government document obtained by Bild, ministers are concerned that it won’t be enough to stop many people – and businesses – falling into financial hardship.

To ensure this doesn’t happen, federal and state economists ministers want to set aside billions more for additional aid. 

Here’s who can get hold of the extra cash – and how.

Renters and private home owners

People who rent an apartment in Germany and home owners who live in their properties can access additional help from the state if they can prove they’re over-burdened by their heating and energy costs.

That could be due to an eye-wateringly high back-payment for energy bills demanded by the landlord or due to the fact that they have to purchase expensive fuel such as wood pellets for heating. 

More specifically, people claiming unemployment benefits such as Bürgergeld can get some extra cash from the Jobcenter after their bills are calculated by the landlord. If they’re facing a hefty back-payment, or Nachzahlung, they can get up to three months of Bürgergeld retroactively to help cover the costs. 

In addition, someone who wants to claim Bürgergeld for a single month will be spared from having to prove the amount of money they have in the bank. Under the ordinary rules for Bürgergeld claimants, job seekers must have less than €40,000 in savings.

According to the government’s calculations, this emergency buffer is set to cost around €500 million. Claims for additional support will be handled by the job centres or social offices.

Small- and medium-sized businesses (SMEs)

Small business owners have been among the hardest hit by the energy crisis – but luckily help may be on its way. 

In the document obtained by Bild, ministers say they assume that the gas and electricity price cap will be an adequate level of support for most SMEs. Nevertheless, there could be a few circumstances in which business owners slip through the net:

  • Business owners may already be facing huge hikes in their energy bills before the price caps come into force, for example in the form of a big back-payment for energy costs over several months, or
  • Businesses may find that, due to exceptional circumstances, they’re still unable to pay their bills – even after the price caps are introduced. 

In these two scenarios, SMEs can apply for extra support from the government. 

To be eligible, businesses must either show that their energy costs quadrupled at least three months between January and November 2022, or they’ll have to show that their energy costs have also multiplied in spite of the energy price cap and that their business is highly energy-intensive or costly.

The government expects this support package to cost around €1 billion and says that the details will be worked out after state premiers agree to the proposals.  

READ ALSO: How electricity prices are rising across Germany

Housing companies 

Large landlords could also be in line for some additional government aid under the ministers’ plans. Due to the way the current rental system works, many are paying high bills for heating and energy that they’re not yet able to recoup from tenants in the end-of-year bill.

Housing complexes in Berlin.

Housing complexes in Berlin. Photo: picture alliance/dpa | Monika Skolimowska

To help housing companies that are in this situation, the government wants to offer loans that could help tide them over. Twenty percent of this credit would be secured by the federal states, and the measure is expected to cost around €1.1 billion. 

Hospitals and care homes  

Care facilities and clinics face exorbitant energy bills – even in ordinary times – so this group of institutions will also be given financial aid, the draft said.

This will come in the form of a one-off support payment and ongoing support with gas and electricity bills. Hospitals and care homes will in many cases get their additional costs for energy completely refunded by the state until April 2024. Social agencies and social service providers will also be given subsidies and financial aid to help deal with their increased overheads. 

In addition, cultural sites and facilities like museums and art galleries will get subsidies intended to flatten out the rise in energy costs. In most cases, the energy price cap only applies to 80 percent of a business’ ordinary consumption, but this limit will be dispensed with for cultural institutions. 

However, the government says it still wants to incentive energy-saving measures as well as offering financial support. 

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

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