Inflation will be lower in 2023 than a year before. But the burden on consumers remains high.
Inflation in Germany is only gradually decreasing. 2023 was the second most expensive year for consumers since reunification, with inflation rising again in December. According to preliminary information from the Federal Statistical Office, consumer prices rose by 5.9 percent on average over the year. The only year in reunified Germany that the figure was higher for a full year was 6.9 percent in 2022. Economists expect inflation rates to fall this year, but the path to permanently lower rates is likely to “remain rocky,” as Deutsche Bank economist Sebastian Becker assesses it.
Commerzbank chief economist Jörg Krämer also believes that the inflation problem has not yet been solved. Political decisions also played a role, such as increasing the CO2 price from 30 euros per ton of carbon dioxide (CO2) to 45 euros. “In the end, inflation is likely to settle at 3 percent rather than 2 percent because wages are rising sharply,” predicts Krämer.
DZ Bank chief economist Michael Holstein also expects increased price pressure in the new year: “This is mainly due to the increased CO2 price and the renewed increase in VAT in the catering industry. We will be at the ECB’s two percent mark in Germany in 2024 That’s why it’s still a long way off.”
The European Central Bank (ECB) is aiming for stable prices in the euro area in the medium term with 2.0 percent inflation. In the fight against high inflation in the common currency area, the monetary authorities have raised key interest rates ten times in a row since summer 2022.
Inflation is likely to be “very anti-social” in 2024 too
DIW President Marcel Fratzscher fears that inflation will continue to be “very anti-social and hit people with low incomes much harder” in 2024. Rents in particular could continue to rise significantly. And energy costs could also increase again because tax relief will no longer apply and the price of CO2 will rise.
Higher inflation rates reduce the purchasing power of consumers, meaning they can then afford one euro less. People’s financial freedom is shrinking and income growth is being eaten up by inflation. According to studies, people with lower incomes are hit particularly hard because they have to spend a higher proportion of their monthly income on energy and food.
After the Russian attack on Ukraine in February 2022, energy and food prices in particular skyrocketed. The inflation rate in Germany climbed to 8.8 in autumn 2022. At the beginning of 2023, inflation was still at 8.7 percent.
Inflation rate rises again in December
According to preliminary calculations by the Federal Office in Wiesbaden, inflation rose again to 3.7 percent in December after five months of declines. In November, the lowest level since June 2021 was reached at 3.2 percent.
An important reason for the trend reversal: a year earlier, in December, the state had taken over the one-time cost of the discount for gas and district heating customers. This price-dampening effect is not included in the calculation for December 2023. Energy prices rose by 4.1 percent compared to the previous month. In the last month of the year that just ended, people had to pay 4.5 percent more for food than a year before. From November to December 2023, consumer prices are expected to have risen by a total of 0.1 percent.
According to Sebastian Dullien from the Institute for Macroeconomics and Business Cycle Research (IMK) of the trade union Hans Böckler Foundation, the inflation dynamic in Germany has broken “and the time of really high inflation rates is over.”
The highest inflation rate in a full year to date was 7.6 percent in what was then the Federal Republic of Germany in 1951. However, the calculation method has changed over time.
Source: Stern
