Inflationary pressures are rising. In Germany, many people worry that they can afford less and less. But the European Central Bank (ECB), which could take countermeasures, is reacting cautiously.
More and more people are noticing inflation in their everyday lives. June brought a small improvement: After 7.9 percent in May, inflation in June fell to 7.6 percent year-on-year, as the Federal Statistical Office officially announced on Wednesday.
In view of the slowdown in price increases, some experts believe that “inflation has probably peaked in Germany”. However, not all economists share this assessment.
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The June inflation rate rose less quickly thanks to the tank discount and the 9-euro ticket, which led to a special effect, says Justus Haucap, director of the Düsseldorf Center for Competition Economics (DICE). This means that the inflation rate has fallen slightly because the state absorbs certain price increases with taxpayers’ money. Nevertheless, the inflation rate remained at a very high level in June.
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One of the main drivers of inflation is still the high and rising energy prices, partly due to the war in Ukraine and the associated uncertainties in gas and oil supplies. According to the Federal Statistical Office, energy was 38 percent more expensive in June than in the same month last year. Food has also become significantly more expensive recently, according to the Federal Statistical Office in June, prices rose by 12.7 percent within a year.
In June, the prices for edible fats and oils rose particularly sharply by 43.1 percent, meat by almost 19 percent, dairy products and eggs by 15.3 percent and bread and cereal products by 12.5 percent.
Producer prices also indicate that things could get even more expensive for consumers for the time being. According to the Federal Statistical Office, in May 2022 these were 33.6 percent higher than in May 2021. That was the highest increase compared to the same month last year since the survey began in 1949. The figures for June will be published in the coming days. In the statistics, the prices are listed from the factory gate – even before the products are further processed or sold.
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In April 2022, the rate of change was 33.5 percent and in March it was 30.9 percent. In a month-on-month comparison, producer prices rose by 1.6 percent in May 2022. This trend is bad news for consumers in Germany, since producer prices are seen as a precursor to the development of general inflation. Experts anticipate that retailers will be able to “pass on” – i.e. pass on – a larger part of the costs to end consumers.
The fears are also supported by a survey by the Munich ifo Institute. According to this, almost every food retailer surveyed wanted to raise their prices in June. The higher price expectations also apply to the other retail sectors, as the institute announced. A majority of around 79 percent of those surveyed want to increase prices in this area as well.
Accordingly, relaxation is not in sight for the time being. Mainly because the uncertainty caused by the pandemic and the geopolitical situation is still high. They have thrown the balance of supply and demand off balance and are fueling inflation.
Companies are not only struggling with increased raw material prices and energy costs, but are also still affected by supply bottlenecks. Due to the global ship jams and the Chinese zero-Covid strategy, companies assume that the material shortage in German industry will continue for months.
In addition to these acute triggers on the supply side, the high inflation is also due to the monetary policy of the European Central Bank (ECB). It has responded to past crises by pumping more and more money into the markets to keep demand high. In doing so, she wanted to stabilize the economy.
The money stock M1, which consists of all bank balances without a specified maturity or period of notice and all currency in circulation in the euro area, has increased more than fivefold since 2000. During the same period, European economic output has not even increased by a factor of one and a half.
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The ECB has now ended its purchases of government bonds and is likely to raise key interest rates again in July for the first time since 2011. But interest rate hikes in the coming months will be so moderate that it is questionable whether high inflation can be brought under control in the near future.
But the ECB is in a dilemma: if it were to raise interest rates too aggressively, it would risk plunging the more heavily indebted countries on the southern euro periphery into financial and economic crises.
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Meanwhile, not only is the euro losing its purchasing power at an unprecedented rate, but the external value of the common currency is also declining. On Tuesday, the euro was worth exactly one dollar for the first time in two decades. Since the beginning of the year, the price has fallen by around 13 cents.
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A weak currency does not necessarily have negative effects. Germany’s export-oriented economy in particular benefited for a long time from the rather weak euro, because its products were cheaper internationally than comparable goods that had to be paid for in stronger currencies. On the other hand, a weak euro makes imports more expensive – which could make the current energy crisis even worse if the energy sources purchased do not come from other euro countries.
One thing is certain: Consumers must be prepared for difficult times. You have less and less left in your wallet. Incomes may have developed positively in recent years, but in the first quarter of 2022 alone they rose by around 4 percent in nominal terms.
But the real wage index shows that the rise in income due to rising consumer prices has long since melted away again. In the first quarter of this year, price-adjusted wages fell by 1.8 percent compared to the previous year.
The trade unions in particular are alarmed and are now demanding appropriate compensation for their members. However, some economists are concerned about the forthcoming collective bargaining rounds and the associated potential wage jumps. They fear that wage and price increases will mutually fuel each other. Ultimately, they believe, this mechanism could lead to even more drastic inflation – the consequences of which everyone would have to bear.
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