Inflation in Germany rises to almost 8 percent

The sharp rise in prices is putting the European Central Bank (ECB) and politicians under pressure. Because the bottom line is that many people are becoming poorer as a result of the associated loss of purchasing power. According to current figures from the Federal Statistical Office, real wages, i.e. nominal wages after deducting inflation, fell by 1.8 percent in the first quarter.

According to a survey published in mid-May by management consultants McKinsey, high inflation is the biggest concern for Germans. Even the war in Ukraine and the corona pandemic are behind it.

The strong price increase is therefore also causing clear reactions in political Berlin. “The top priority must be to fight inflation,” said Federal Finance Minister Christian Lindner (FDP) at a press conference in Berlin. An “enormous risk” arises from the high price increases. As a consequence, he announced an “end to the expansive financial policy”. In the coming year, Lindner wants to comply with the debt brake again, but the deficit must be drastically reduced. The state should not drive up prices even further with additional spending.

ECB wants to fight inflation

The chief economist at Berenberg Bank, Holger Schmieding, attributed the renewed increase primarily to the somewhat higher oil price and significantly increased food prices. “Putin’s war is hitting consumers even harder than before.”

The ECB intends to turn around interest rates soon in order to curb the rise in inflation. She had long assumed that the problem would largely resolve itself once the special effects of the pandemic petered out. This hope has turned out to be a fallacy.

Leading representatives of the central bank have recently signaled interest rate hikes. “Based on the current outlook, we will likely be able to end negative interest rates by the end of the third quarter,” Fed Chair Christine Lagarde wrote in a blog post last week.

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There she also held out the prospect of “a gradual further normalization of interest rates towards the neutral interest rate” in the medium term. This means the level where interest rates are neither supporting nor slowing down the economy.

The neutral rate can only be estimated. Where it is located is very controversial among economists. Austria’s central bank governor Robert Holzmann, who is seen as a supporter of tighter monetary policy, recently said he put it at around 1.5 percent. This would mean that interest rates could continue to rise quite quickly.

Inflation and energy prices determine political debate

The traffic light government is now also extremely concerned about the issue of inflation. It is true that it has already launched two relief packages with a volume of 30 billion euros as a result of the high energy prices. Large parts of the second package will come into effect on June 1st, such as the fuel discount. However, measures such as the energy allowance of 300 euros, which every employed person is to receive once, threaten to fizzle out in view of the rising food and energy prices.

According to the Federal Ministry of Finance, the temporary reduction in the energy tax on fuels, which is planned under the heading of tank discounts and will take effect from Wednesday, will not lead to an abrupt price reduction for petrol and diesel at filling stations either. The tanks there are still filled with fuels that were delivered in May at the old tax rates, the ministry said on Monday. Only gradually would the gas stations buy fuel with the reduced tax rates from June 1st. With the fuel bought later, the lower price is gradually reaching the consumer.

Traffic light is under pressure because of the next state election

The topic should therefore continue to dominate the political debate. After losing the state elections in North Rhine-Westphalia, the SPD stated that one of the main reasons for the defeat was that the rising cost of living was not much more of an issue during the election campaign. Since the next important state election in Lower Saxony is due in October, the traffic light sees itself under pressure to act.

The traffic light government is therefore working feverishly on a new, third relief package. But the ideas of the three governing parties differ significantly. SPD Labor Minister Hubertus Heil surprised his coalition partners at the weekend by proposing “social climate money”. According to this, from January 1, 2023, all incomes under 4,000 euros are to receive the new climate money, for married couples the threshold is 8,000 euros gross monthly income.

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It is important to structure the climate money “socially graded – according to the principle: Those who need it most get the most, said the minister. In addition, Heil wants to increase the standard rates for recipients of the new basic income, which will replace Hartz IV and will also come on January 1, 2023, by 40 to 50 euros per month.

In the FDP, however, the proposals were rejected. “Since debt and tax increases are ruled out, I’m curious about the financing ideas,” said Finance Minister Lindner. Instead of creating new subsidy pots, the FDP boss wants to compensate for inflation-related tax increases at the end of the year. In view of the high inflation, this will also be an expensive affair.

A reduction in cold progression, on the other hand, does not meet with much enthusiasm from the SPD and Greens, since higher incomes would benefit more from this compensation than lower and middle incomes. However, the Greens also view Heil’s proposal for social climate money with a certain skepticism.

In principle, they praised the idea. However, the agreement in the coalition agreement provided for general climate money for everyone, not just for those on lower incomes. The Greens see climate money as a climate policy instrument and fear it could be overburdened by Heil’s socio-political ideas.

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