Status: 03/30/2022 14:29
In March, the inflation rate in Germany soared to its highest level in about 40 years. The sharp rise in energy prices is behind the sudden increase.
According to an initial estimate by the Federal Statistical Office, consumer prices in the Federal Republic rose by 7.3 percent compared to the same month last year, and therefore higher than ever before in reunified Germany. The last time the inflation rate in the former federal states was as high as it was in March was in the fall of 1981, when mineral oil prices also rose significantly as a result of the effects of the First Gulf War.
A look at history shows how unusual such a sharp rise in prices is: even in the former federal territory, inflation rates of more than 7% were rare and were only found in the early 1980s, 1970s and 1950s, as the economist- Commerzbank chief Jörg Krämer emphasizes.
How inflation erodes income
But what does historically high inflation mean for people in Germany? High inflation rates reduce consumers’ purchasing power because they can pay less for one euro. “The dual crisis of Corona and the war in Ukraine is costing us prosperity,” emphasizes LBBW economist Jens-Oliver Niklasch. The purchasing power of pensions and income is decreasing considerably, and savings are also not protected against a loss of real value due to mini interest rates.
“The sobering figure of a price increase of more than 7% means a huge real devaluation of income in the German economy – income from work, pensions and transfers, business and capital income,” says Michael Heise, chief economist at HQ Trust .
Rising heating oil and gasoline prices
Once again, energy prices were the main driver of inflation. “The fact that inflation rose to 7.3% in March is mainly due to the war in Ukraine, which sent heating oil and gasoline prices soaring”, emphasizes Kramer. But also in addition to energy, prices rose in all sectors.
According to preliminary statistics, people in Germany had to spend 39.5% more on energy and domestic fuel in March than in the same month last year. Food prices rose 6.2% in one year.
In the context of rising energy prices, several institutes have recently increased their forecasts for the annual inflation rate. The German Council of Economic Experts, for example, expects an inflation rate of 6.1 percent for 2022. The ifo Institute in Munich predicted a rise in consumer prices of 5.1 to 6.1 percent for the year in course.
High inflation puts the ECB under pressure
High inflation in the euro zone’s largest economy is raising expectations about the European Central Bank’s (ECB) monetary policy. “We will face higher inflation and lower growth in the short term,” warned ECB President Christine Lagarde, today in Nicosia.
While the ECB head has so far kept a low profile with indications of an imminent interest rate turnaround, member countries have recently issued very clear calls to action: Austria’s central bank chief Robert Holzmann believes that an increase in interest rates by the ECB is possible as early as the end of summer.
“If there are no more new bond purchases in July, the first interest rate step could be taken in September,” Holzmann said in Vienna today. When inflation rises, the central bank’s job is to raise interest rates. Dutch central bank governor Klaas Knot recently did not rule out two interest rate hikes this year.
Ten-year yield with four-year high
In a context of rising inflation and interest rate expectations, bond market yields have been rising for several weeks. Just yesterday, the much-noted yield on the ten-year Bund rose to its highest level since February 2018, at 0.74%. If the ECB changes course to raise interest rates, the euro will also have bullish potential again.