Anyone who believed or at least hoped that the rising prices were not least caused by the temporary reduction in value added tax and later increasing it again is mistaken. A rapid end to inflation rates that are well above the inflation target of the European Central Bank (ECB) of two percent is not in sight. In its annual economic report for 2022, the federal government expects an average annual increase in the price level of 3.3 percent, after 3.1 percent in the previous year.
The most important reasons for the price increase are manifold: The reasons are the lack of chips, interrupted supply chains and a growing global demand for energy and raw materials with simultaneous supply shortages due to geopolitical tensions.
Prof. Bert Rürup is President of the Handelsblatt Research Institute (HRI) and Chief Economist of the Handelsblatt. For many years he was a member and chairman of the German Council of Economic Experts and an adviser to several federal and foreign governments. You can find out more about the work of Professor Rürup and his team at research.handelsblatt.com.
These are all reasons that neither the German government’s economic policy nor the ECB’s monetary policy can do anything about. Another important driver, however, is the politically desired increase in the price of energy from fossil fuels.
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This is intended to reduce emissions of the greenhouse gas CO2, which – at least in Germany – is supported by a large majority. Economist Volker Wieland estimates that the new CO2 tax, together with the shortage of climate certificates, increased consumer prices by around one percent last year.
Inflation moves many citizens
The ECB has been responsible for monetary stability in the euro zone since 1999 and has to keep an eye on the entire currency area. However, the federal government alone is responsible for national problems and political responses to them. But this seems to be waiting for inflation to subside on its own. Inflation is a topic that moves many people deeply. Their enormous distribution effects actually require an open social and political debate.
Inflation losers are not only savers who have to accept negative real interest rates on their financial assets. Losers are also those people whose wages or transfer income are not linked to inflation – which is likely to be the case for the vast majority.
The Bafög rates did not change at the turn of the year, and the unemployment benefit, which is based on the last salary received, also remained unchanged. Basic social security was increased by a modest 0.7 percent in early January, while the cost of living has risen by around 5 percent in a year. The surge in inflation has also not been taken into account in most wages and salaries, whether they are subject to collective bargaining agreements or not.
The new President of the Bundesbank, Joachim Nagel, rightly pointed out in his inaugural speech that inflation “also has social costs” – and these social costs need to be discussed politically and taken seriously, especially by a government led by social democrats.
So far there is little evidence of this. The grand coalition at the time of Wolfgang Schäuble as finance minister undertook to return the additional income resulting from “cold progression” to the taxpayers. This was to prevent higher tax rates attributable to increases in income that merely compensate for inflation.
However, as a result of a blatantly incorrect forecast of the increase in price levels at the time the corresponding amendment to the law was passed, the 2022 tariff was adjusted far too low.
There are no plans to at least compensate for the resulting additional tax revenue with the next tariff shift. This leaves the state with permanent and fundamentally unjustified additional income.
In principle, the same applies to the threshold values for inheritance tax. The 20,000 euros that someone can inherit tax-free from their brother have melted down to 19,400 euros in real terms in the past year alone. If the government is right with its inflation forecast, this real allowance will shrink to just under 18,800 euros this year. Here, as with many other tax limits set in euros, regular adjustments would be advisable.
Effective purchasing power of low earners is dwindling
Dealing with the politically desired price increases that are triggered by the energy transition is particularly tricky. In the same way that a tobacco tax dampens the demand for cigarettes, a CO2 tax ideally leads to fewer fossil fuels being used, thereby protecting the climate.
This becomes a problem if this demand cannot be reduced because basic needs are affected. Freezing, sitting in the dark from time to time, wearing thick sweaters or taking cold showers should not be an option for most people to counter rising energy prices. Since at least those on low wages, whose savings rate is zero, have to save elsewhere, their effective purchasing power falls.
The same applies to the higher meat prices demanded by Agriculture Minister Cem Özdemir (The Greens). This may be well received by vegetarians and some ranchers, but for the majority of consumers, higher meat prices simply meant a loss of prosperity.
In addition, politicians do not support those who are really in need of the unavoidable costs of climate protection. It is not uncommon for green subsidies to mostly benefit the upper middle class. For property owners, a photovoltaic system may be a profitable investment that makes it easier to cope with higher electricity prices. Low-income tenants do not have this option. And people with above-average incomes are happy about the generously subsidized purchase of a new electric car, while many average earners have to continue to drive their combustion engines to work.
Politicians owe citizens a quick response
The last grand coalition wanted to convince the citizens that decarbonization was possible for free. On the other hand, Vice Chancellor Robert Habeck (Die Grünen) honestly admitted that “unlike what is said in Sunday speeches (the energy transition) will not come off without impositions”. However, tactically clever, he failed to provide an answer as to how low earners and the welfare state, which is under financial pressure, should deal with it. Thoughts about abolishing the EEG surcharge or reducing the electricity and value-added tax on energy would be possible but very expensive ad hoc measures – but they are not a real strategy.
For quite a few voters of an SPD chancellor whose party advertised with the slogan “Social policy for you”, Habeck’s words are likely to come across as almost mockery. It will be interesting to see what answers Chancellor Olaf Scholz and Hubertus Heil come up with in order to ensure that the necessary energy transition does not fail because of distribution policy distortions. Without quick answers to the “impositions” the broad approval of climate protection could soon tip over.
More: Do we need gas and nuclear power to achieve the climate goals? – The EU Commission says yes