Frankfurt, Berlin Inflation in Germany rose significantly more than expected in September. Consumer prices increased by 10.0 percent compared to the previous year to. This was announced by the Federal Statistical Office on Thursday based on a preliminary estimate. This is the highest level since December 1951, when annual inflation – with largely comparable data – was 10.5 percent.
In August, inflation was still 7.9 percent. Economists polled by the Reuters news agency had expected a figure of 9.4 percent for September. The reasons for the increase are the end of the tank discount and the discontinuation of the nine-euro ticket. The traffic light coalition’s two relief measures expired at the end of August and had previously dampened inflation.
Commerzbank chief economist Jörg Krämer says: “Inflation in Germany is once again clearly visible.” It wasn’t that high even in the 1970s. “Prices are also rising faster and faster beyond energy. That is worrying.”
From the point of view of the General Manager of the Association of German Chambers of Industry and Commerce (DIHK), Martin Wansleben, “the exploding energy prices in particular are hitting many companies hard.” The consequences are production stops, losses in value creation, production relocations and company closures. “Our economic structure and our prosperity in Germany are increasingly at risk,” he warns.
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The drastic price hike is becoming an ever-growing problem, both politically and economically. At the beginning of the week, several thousand people demonstrated against high inflation in various cities in East Germany. Companies in energy-intensive sectors in particular fear for their existence. And according to many experts, the end of the rise in inflation has not yet been reached. In its current monthly report, the Bundesbank expects inflation rates to remain in the double digits in the coming months.
In their joint forecast for the Federal Ministry of Economics, which was presented on Thursday, the four major German economic research institutes forecast that the inflation rate will continue to rise in the coming year. For 2022 they see an average inflation of 8.4 percent, in 2023 the rate should then climb to 8.8 percent.
The passing on of the increased prices will “continue for a very long time,” said Torsten Schmidt, head of economic activity at the Leibniz Institute for Economic Research (RWI). Inflation will rise again at the beginning of the coming year, and there will only be a relaxation in the spring.
The economic researchers warned of an expansive fiscal policy that could further fuel inflation. So inflation is not only driven by energy prices. “Under the energy price wave, the domestic tide of inflation has risen,” said Stefan Kooths, Vice President of the Kiel Institute for the World Economy (IfW).
Energy-intensive companies cut production – recession expected
Commerzbank chief economist Krämer points out that high inflation reduces the purchasing power of consumers and forces them to save. In addition, many business activities would become unprofitable due to high energy prices. The energy-intensive companies have already reduced their production by seven percent since February. “All of this is a heavy burden for the economy, which is why I expect a recession for the winter half-year.”
Energy prices are currently by far the strongest driver of inflation. In September they increased by 43.9 percent compared to the previous year. This was a significantly stronger increase than in August, when the increase was 35.6 percent. Energy prices are likely to continue to drive up inflation in the coming months. As a rule, they only gradually affect inflation because, for example, electricity and gas prices for households are only adjusted over time. This often happens at the beginning of the year.
The director of the Institute for Macroeconomics and Business Cycle Research (IMK), which is close to the union, Sebastian Dullien, sees this as the main reason why inflation has probably not yet peaked.
“In the coming months, things will continue to improve,” he says. “In particular, the high wholesale gas prices are likely to be passed on to private households into 2023.” Dullien expects inflation to exceed the psychologically important ten percent mark over the winter.
In view of the high inflation, the ECB recently raised interest rates significantly. After a first step in July, it raised the key interest rate by 0.75 percentage points in September. This was the largest interest rate move in its history.
Many economists are also expecting further increases for the upcoming meetings in October, December and February. However, central bank representatives have repeatedly emphasized that they can hardly influence energy prices in this way.
From their point of view, the main thing is to keep inflation expectations stable. ECB Vice President Luis de Guindos recently said that the main aim was to prevent second-round effects. This refers to price increases as a reaction to previous cost increases.
Food prices are also rising sharply
In addition to energy, food prices also rose particularly sharply in September, with an increase of 18.7 percent. Goods increased in price by 17.2 percent and services by 3.6 percent.
From the point of view of Carsten Brzeski, economist at the Dutch bank ING, a recession has “been inevitable for a long time”. First the price surge hit the consumers, now this is increasingly affecting the companies.
The high costs could no longer be passed on because of the lower purchasing power. “Of course, the industry has been hit hardest by the increased costs, but it keeps going.” The falling purchasing power will also make itself felt in the service sector. The supply and demand sides of the German economy are severely affected. “We’re losing economic prosperity that won’t come back anytime soon.”
High inflation is affecting companies to varying degrees. “There are clear differences in the extent to which companies can pass on the inflation-related cost increases to customers,” says Sebastian Olbert, Managing Director of management consultancy LEK Consulting. “This works best in sectors where there are no long-term contracts or indexed price escalation clauses.” In other words, where companies can adjust prices quickly.
Inflation hits sectors with fixed prices in particular
As an example, Olbert cites the energy industry and the transport sector, i.e. deliveries by truck or ship. On the other hand, sectors in which there are fixed prices, such as in the pharmaceutical and healthcare sectors, would have greater problems. “There, cost increases have to be offset by savings.”
In addition, there are many industries that cannot further increase prices for other reasons. “This applies, for example, to the construction industry, where prices have already risen sharply due to more expensive raw materials,” says Olbert. From his point of view, small companies are particularly affected because they have less negotiating power and less leeway to set prices with customers and suppliers.
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