Inflation highest since 1951 – Economy

It was a black Thursday for the German economy: The Federal Statistical Office reported an inflation rate of 10.0 percent, the highest in 71 years. And the economic researchers predict in their autumn report that the price increase in 2023 will be even higher on average – the main reason why the German economy is likely to slide into recession.

In August, the inflation rate was still 7.9 percent. The strong increase is mainly due to the fact that the nine-euro ticket and the tank discount expired after three months at the end of August. Germans now have to pay significantly more for public transport and petrol.

But what worries economists even more is that, regardless of this, the trend towards higher prices is becoming entrenched everywhere: Because the prices for oil, gas, electricity and some food have risen sharply since the outbreak of the Ukraine war, many companies are passing on their higher costs also to almost all other products. “Prices are rising faster and faster across the board,” says Jörg Kramer, chief economist at Commerzbank. Nine-euro tickets and fuel discounts have distorted the situation in recent months, but now the unvarnished truth is showing: a dangerously strong general price increase. An inflation rate of ten percent in one month did not even exist in Germany during the oil crisis in the early 1970s. You have to go back to 1951 to find a higher rate of inflation. At that time, the outbreak of the Korean War sent commodity and producer prices skyrocketing.

“More and more people no longer trust the European Central Bank’s (ECB) promise to bring the inflation rate down to two percent,” says economist Krämer. You’ve been downplaying the problem for too long. It is therefore important that they continue to raise interest rates sharply, preferably by 0.75 percentage points at each meeting. Krämer is convinced that the ECB should aim for a deposit rate of around four percent, and one percent in the medium term inflation of two percent again. This deposit rate is currently 0.75 percent.

An inflation rate of ten percent is likely to cause further concern among Germans. Poorer households in particular suffer from high inflation, as they often have no savings to absorb the sharp rise in prices. The discussions about how the federal government can relieve these people in particular could now pick up speed again.

Economists call for more rate hikes

Ulrich Kater, chief economist at Deka Bank, tries to calm things down on at least one point: “The inflation rate is likely to peak soon,” he says. He expects price increases to slowly decline from December, mainly due to falling oil and gas prices. “Therefore, there is no justification for citizens to panic because of ever-increasing inflation.” Nevertheless, Germany has a long-term inflation problem, even if not on the current scale. After the decline, the price increase is likely to remain at a level of three to four percent. Therefore, the ECB cannot give the all-clear. You must continue to act decisively with higher interest rates against the high inflation. “Unlike the US Federal Reserve, it started too late, if you slept a little at the beginning, you have to run faster to get back on track,” says the economist.

It is mainly due to the high prices that Germany, in the midst of its recovery from the Corona crisis, is likely to slip into recession again soon. Inflation, driven up by energy prices, reduces incomes so people consume less. “The Russian attack on Ukraine and the resulting crisis on the energy markets are leading to a noticeable slump,” says Torsten Schmidt from the RWI Institute.

In their joint autumn forecast, the RWI, Ifo, IWH and IfW institutes clearly state who is causing the economic slump. the Economy already deteriorated after the Russian invasion of Ukraine in February. Now that Russia has severely reduced its gas supplies, a significant part of the gas supply has been lost – and prices have skyrocketed. The high energy and food prices take away a lot of people’s purchasing power.

Probably not lack of gas

After all, thanks to the filled storage tanks in normal weather, a gas shortage is not to be expected in winter, according to the autumn forecast. However, the supply situation remains tense. In the medium term, gas prices are likely to be well above pre-crisis levels. This means a permanent loss of prosperity for Germany. According to this, economic output will be down by a total of 160 billion euros this year and next.

The researchers have therefore halved their forecast for this year and only expect economic growth of 1.4 percent. In 2023 the economy will shrink. Only in the following year should it expand again by almost two percent. The energy dip in economic output would thus be far less than that caused by the Corona slump in 2020. However, if the Ukraine war escalates, prices rise even more or a lack of gas shuts down factories, the economy will shrink more sharply next year.

Inflation even higher in the coming year

Citizens will feel the price increases even more. “The massive increase in energy prices caused by the Russian war of aggression and the halt in gas supplies represents a price shock for the German economy that is unique in the post-war period,” says Sebastian Dullien, Director of the IMK Institute. The exchange price for energy has risen by 1000 percent since 2019. “For the most part, this has not yet reached consumers, as many households have longer-term contracts with their suppliers. The majority of the price increases will be felt in the coming winter months.”

According to the autumn forecast, inflation next year will be even higher than this year at 8.8 percent. Price increases did not calm down again until 2024. The high inflation means that many employees suffer inflation-adjusted wage cuts, according to Guido Baldi from the German Institute for Economic Research (DIW): “Households with low and middle incomes in particular are at risk of getting into financial difficulties.”

Companies feel the crisis

According to Baldi, the energy crisis is also becoming the main problem for German industry. After all, most people don’t need to worry about losing their jobs at the moment, according to RWI economic chief Schmidt. “Due to the shortage of skilled workers in many areas, however, companies will endeavor to keep the existing workforce.”

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