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Questions & Answers: One year of war in Ukraine: Energy price shock and inflation

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Russia’s war against Ukraine also has consequences for consumers in Germany. Economists expect that the high inflation will only disappear again slowly.

First seven, then more than ten percent: The start of the Russian war against Ukraine on February 24, 2022 was also a turning point for inflation in Germany.

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The inflation rate climbed to new highs almost every month. According to earlier information from the Federal Statistical Office, consumer prices in Europe’s largest economy rose by an average of 7.9 percent over the past year compared to the previous year. The Federal Republic has not experienced such a price shock in the more than 70 years since it was founded.

Why is inflation suddenly picking up so much?

For years, inflation in Germany and other euro countries languished. As early as 2021, higher energy prices in particular as part of the global economic recovery after the Corona crisis in 2020 pushed the inflation rate up. In addition, there was a shortage of materials and delivery bottlenecks as a result of the pandemic. The Russian attack on Ukraine exacerbated the price development significantly last year. “The historically high annual inflation rate was mainly driven by the extreme price increases for energy products and food since the beginning of the war in Ukraine,” explained Ruth Brand, President of the Federal Statistical Office.

What is the impact of the war on energy prices?

Oil prices skyrocketed in the first weeks of the Ukraine war. Fuel prices reached record levels at times. In the summer, a widespread halt to the delivery of natural gas from Russia to Western Europe triggered a surge in gas prices. Germany is particularly dependent on energy imports and is therefore clearly feeling the economic consequences of the Russian war of aggression. On average, consumers in Germany had to pay 87 percent more for heating oil last year than in 2021, and natural gas rose by 64.8 percent. Electricity prices rose by 20.1 percent. Motorists paid 26.8 percent more at the filling station than in the previous year.

What else has become significantly more expensive?

Food prices also rose at an above-average rate. Farmers complained about higher costs: from energy to fodder to nitrogen fertilizer. Retail pointed out, among other things, high energy and raw material costs. On average, consumers had to pay 13.4 percent more for food last year than in 2021. The food industry expects food prices to continue to rise in the current year. “2022 was still a mixed calculation with old 2021 prices. The peaks in prices in 2022 will still be noticeable in 2023 and will make an impact,” said Christian von Boetticher, chairman of the Federal Association of the German Food Industry.

What are the consequences of the increased prices for people?

Higher inflation rates reduce the purchasing power of consumers because they can afford less for one euro. Especially when goods that are bought frequently become more expensive, people notice this in their wallets: when filling up with gas and in the supermarket. According to studies, households with comparatively low incomes are hit particularly hard. The price drivers household energy and groceries make up a significantly larger share of their entire shopping basket than do those who are more affluent.

Can people hope for a slowdown in inflation?

Economists do not expect a thorough easing of prices in the current year, even if the peak of the increase is likely to have been passed. The problem: According to economists, inflation has spread from energy and food to many other products and has become more widespread. “There is a risk that inflation will solidify,” fears Ifo expert Sascha Möhrle. According to Commerzbank chief economist Jörg Krämer, the so-called core inflation excluding energy and food is likely to remain stubbornly high, mainly due to rising wage costs: It is too early to give the all-clear on inflation. The federal government is anticipating an average inflation rate of 6.0 percent for 2023.

How are the state’s relief measures working?

The state is spending billions to relieve consumers and the economy from the high energy prices. In the summer of 2022, the 9-euro ticket limited to three months and the fuel discount temporarily dampened the rise in consumer prices. After the expiry of cheap tickets for local public transport and the reduction in taxes on fuel, the inflation rate picked up again. The highest rate of inflation was measured in October at 10.4 percent. At the end of 2022, the one-off assumption of the down payment for gas and district heating customers by the state provided some relief. In the current year, the state gas and electricity price brakes are likely to dampen price increases.

Source: Stern

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