Record-breaking inflation rates continue to cause problems for Germany’s consumers. Surprisingly, the rate of inflation rose again in April: Consumer prices were 7.4 percent higher than in the same month last year, as calculated by the Federal Statistical Office on the basis of provisional data. In March, the annual rate of inflation had already reached its highest level since German reunification in 1990, at 7.3 percent.
Impact on purchasing power
Due to the tense situation with energy prices and ongoing concerns about a Russian supply freeze, economists do not expect inflation to fall quickly in the coming months. The latest forecasts predict inflation in Germany of more than six percent for 2022 as a whole. Last year, consumer prices increased by 3.1 percent on average.
The outlook for consumers is bleak, because higher inflation rates reduce their purchasing power: they can afford less for one euro. At gas stations, in supermarkets and with heating costs, people have recently had to dig deeper into their wallets. According to preliminary figures from Thursday, the price level rose by 0.8 percent from March to April 2022.
Rising energy prices
Above all, sharply increased energy prices have been driving inflation for months. The Russian attack on Ukraine on February 24 pushed oil and gas prices higher. According to preliminary data from the Federal Office in Wiesbaden, people in Germany had to spend 35.3 percent more on household energy and fuel in April than in the same month last year. In March it was even 39.5 percent more. Food prices in April were 8.5 percent above the previous year’s level, in March it was 6.2 percent.
Inflation rates that were as high as in March and April of this year were last seen in the old federal states in the fall of 1981, when mineral oil prices also rose sharply as a result of the effects of the First Gulf War. “Let’s put it this way: Most citizens and politicians have hardly ever seen such inflation rates in their professional lives,” commented ING Germany chief economist Carsten Brzeski. In February, inflation in Germany was still 5.1 percent.
In the euro zone, too, energy prices in particular are driving inflation upwards. In March, consumer prices in the currency area rose by 7.4 percent year-on-year, according to statistics from the Eurostat office. This is the highest level since the euro was introduced as a settlement currency in 1999. In February of the current year, the inflation rate in the euro area was still 5.9 percent.
criticism of the ECB
Persistently high inflation is increasing pressure on the European Central Bank (ECB) to end its policy of easy money and raise interest rates. In April, the harmonized index of consumer prices HICP, which is decisive for monetary policy, was 7.8 percent above the previous year’s level in Germany, Europe’s largest economy.
Critics have long accused the ECB of fueling inflation with its flood of money. The primary goal of the central bank is stable prices with two percent inflation. The ECB could respond to high inflation by raising interest rates. “We have a serious inflation problem,” warned Commerzbank chief economist Jörg Kramer. “It’s high time the ECB took its foot off the gas and hiked interest rates.” Friedrich Heinemann from Mannheim’s ZEW confirmed: “There is no way around a quick end to the bond purchases and an early first rate hike.”
In recent statements, several members of the central bank’s highest decision-making body, the ECB Council, did not rule out an initial interest rate hike in July of this year. “The task of the European Central Bank is price stability,” affirmed ECB President Christine Lagarde on Wednesday in Hamburg. In order to guarantee this, the ECB decided to phase out its multi-billion dollar bond purchases more quickly – “with a high degree of probability early in the third quarter, probably in July”. That’s the time to “look at interest rates and an increase in interest rates,” Lagarde said. (dpa)