Why inflation is on the rise again in Germany

AFP/The Local
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Why inflation is on the rise again in Germany
A full shopping cart at an Edeka in Neubiberg, Bavaria in January. Photo: picture alliance/dpa | Sven Hoppe

German inflation picked up slightly in January, preliminary data showed Thursday, as the impact of a one-off energy subsidy the month before wore off.


Consumer prices accelerated by 8.7 percent year-on-year, federal statistics agency Destatis said, up from 8.6 percent in December.

Skyrocketing prices for energy and food have been driving inflation for months - and in turn reducing the purchasing power of consumers, who can now afford less per euro.

READ ALSO: How much will grocery prices in Germany go up in 2023?

Economists currently do not expect any sweeping easing in consumer prices in the coming year, even as energy prices have dipped slightly.

"It would be dangerous to think that we are already through and the inflation problem is settled," Bundesbank President Joachim Nagel recently told the Börsen-Zeitung.

What difference do price brakes make?

Last October, the German government unveiled a €200 billion energy support package to cushion the impact, including a subsidy in December covering the gas bill for households and businesses.

The package also includes a cap on electricity and gas prices starting this year.

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

 Yet while electricity and gas price breaks could slow the rate of inflation, the government is not able to cushion all the consequences.

"The real loss of income and purchasing power associated with the high price increases will weigh on domestic economic development despite extensive government support measures," Germany's latest annual economic report said.


Energy prices have also declined recently thanks to mild winter weather, a race to diversify supplies - for example with new harbourside natural gas terminals - and energy-saving efforts.

READ ALSO: Germany plans more LNG capacity as Russian gas dwindles

Although this has helped bring eurozone inflation down from a peak of more than 10 percent in October, price pressures remain high.

"While pressures from energy prices will decline in perspective, service and industrial goods prices are gaining in importance this year," read the report.

Russia's invasion of Ukraine a year ago pushed up food and energy costs across Europe, sending inflation soaring.

The European Central Bank has raised interest rates at an unprecedented pace since July to bring inflation back down to its two-percent target.

The key interest rate that affects consumer savings and borrowing rates currently stands at three percent. 

ECB President Christine Lagarde said last week that the bank would hike rates by a further 50 basis points in March.

'Smaller than expected'

The increase was still smaller than expected, with analysts surveyed by FactSet predicting price growth of 8.9 percent. Destatis was initially scheduled to release its January data last week, but delayed the publication due to an "unexpected technical problem".

In 2022 as a whole, the inflation rate reached an average of 7.9 percent, the highest level since the founding of the Bundesrepublik.

The German government has predicted that 2023 will see an average inflation rate of six percent.

"Inflation will abate in the course of the year: we expect an average inflation rate of around six percent this year, with 3.6 percent in the last
quarter," European Central Bank vice-president Luis de Guindos interview with Germany's Süddeutsche newspaper.


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