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The Inflation Situation: Germany

The German government has taken proactive steps to fight inflation. A couple of its initiatives to ease the burdens on everyday citizens, such as 9-euro public transport passes and fuel discounts, ended up being like spitting in the wind. Europe’s largest economy and bellwether still saw a record 7.9 per cent inflation in August, according to Destatis, the country’s Federal Statistics Office. Even though price increases for transport slowed from 16.3 per cent in May to only 3.7 per cent in August, other key areas saw heavily increased rates. The main reasons for high inflation are price increases for energy products and food. Fuel prices surged 35.6 per cent despite relief measures, and food prices only rose 16.6 per cent year-over-year. Core inflation, which measures inflation without volatile items like food and energy, rose only 3.5 per cent, which is much better than the situation in the United States, where core inflation is more than double Germany’s rate.

Where it hits

To fight surging prices, the German government has continued to adopt measures to fight the inflation monster. The government recently announced relief measures of 65 million euros, which, when combined with previous packages, total 95 billion euros. Within these measures is a one-time payment that will enable households to pay their heating bills in the upcoming winter. Christian Lindner, the nation’s Minister of Finance, has stated that high inflation levels are an “impoverishment programme for families in the middle of society”. Put slightly differently, these high prices are pulling the middle class into situations – energy insecurity, food insecurity – that middle classes of rich nations should be able to avoid. But with 9.3 per cent inflation predicted for 2023, real incomes are expected to fall further. That means that the average German will have less spending power than they did just a year ago, despite the government’s efforts thus far.

Institutional Gloom

Three of the country’s top economic institutes changed their forecasts for 2023 based on recent inflation numbers. The IfW institute predicted the economy would actually contract in 2023, which is a 180-degree change from previous predictions of 3.3% and 2.0% growth. The IfW is now saying that the economy would shrink by .7%. Another institute, the IWH, predicts a sharper contraction of 1.4%. In contrast, the RWI institute still predicts growth of .8%. For 2022, all three institutes still expect growth in the range of 1.1% to 1.4%. As the IfW economists put it, “The German economy is in a downward spiral”. If the German government does not plan more aggressive interventions, this spiral is set to continue for the next few years.