Despite falling again, inflation in Germany has remained stubbornly above the six percent mark. In August, consumer prices were 6.1 percent higher than in the same month last year, as calculated by the Federal Statistical Office based on preliminary inflation data. Economists expect the recent downward trend to continue in the coming months, but the high price level is not likely to disappear overnight.
“The disappointing August figures should not be overstated,” says Dekabank chief economist Ulrich Kater. “At the preliminary stages of consumer prices, i.e. for producers and imports, prices are now even falling. This easing of price pressure will also affect consumer prices from September.”
Inflation in Germany is already a long way from its highest level since reunification, at 8.8 percent in autumn 2022. After an interim increase to 6.4 percent in June of the current year, the annual inflation rate fell to 6.2 percent in July. In May 2023, however, the rate had already been 6.1 percent.
Private consumption slowed down for months
For months, high inflation has been slowing down private consumption, people can afford less for one euro. From July to August of the current year, consumer prices are expected to have increased by 0.3 percent overall, as Wiesbaden statisticians announced on Wednesday.
The chief economist of the fund provider Union Investment, Jörg Zeuner, explained that a more rapid decline in inflation is being prevented on the one hand by the recent rise in energy prices and on the other hand by the still solid situation on the labor market: “This leads to decent wage dynamics and has the strong receive further support for summer tourism.”
However, many economists expect inflation rates to continue to fall in the coming months. “In September, the inflation rate is likely to drop by an estimated 1.5 percentage points, because then the effect of the 9-euro ticket and the tank discount will no longer be compared to the previous year,” predicted Commerzbank chief economist Jörg Krämer.
Because of this so-called base effect, the economists at Landesbank Hessen-Thüringen (Helaba) are also predicting a “significant decline” in inflation from September: “Towards the end of the year, values of around four percent should be possible.” Last summer, that was in June 2022 9-euro ticket for local transport, introduced for three months, dampened price increases in Germany.
More purchasing power for the first time
Economists do not expect a return to a two before the decimal point in the general inflation rate until the coming year on average. With medium-term inflation of 2.0 percent in the euro area, the monetary watchdogs of the European Central Bank (ECB) see their goal of stable prices achieved. In August, the so-called HICP, which the ECB uses for its monetary policy, was 6.4 percent in Germany, Europe’s largest economy, according to preliminary figures.
The ECB is trying to curb inflation by raising interest rates. Higher interest rates make borrowing more expensive, which can slow demand. Since the summer of 2022, the central bank has raised interest rates nine times in a row. At 4.25 percent, the key interest rate at which commercial banks can get fresh money from the ECB is now as high as it was at the beginning of the global financial crisis in early October 2008.
Central Bank President Christine Lagarde recently left open whether the ECB Council will raise interest rates further at its meeting on September 14 or whether it will take a break. With reference to the weakening economy, the advocates of an interest rate pause could prevail. Because the rapidly rising interest rates are a burden for the economy because they make credit-financed investments more expensive.
Meanwhile, according to economists, private consumption should pick up speed again in the next few months. This is also supported by the fact that real wages in Germany rose slightly in the second quarter for the first time in two years, meaning that people have more purchasing power again. (dpa)