NOnly at first glance did the figures published by the Federal Statistical Office on Monday afternoon suggest that there was reason to take a deep breath: According to preliminary estimates, the inflation rate in Germany was 4.9 percent in January – the first time in more than half a year again lower than in the previous month. In December, prices had risen by 5.3 percent.
But this is actually bad news for German consumers, because the drop in the inflation rate was much smaller than most economists had expected in advance. On average, the experts assumed an increase of 4.3 percent, because in January an important inflationary effect disappeared for the first time: the VAT reduction introduced at the beginning of the Corona crisis. The tax rose again in January 2021 from 16 to 19 percent.
Up to this point, the reduction had led to an upward bias in price comparisons compared to the previous year; this bias is now gone. “This alone has reduced the inflation rate by around one percentage point compared to December,” calculates Nils Jannsen, head of the German economics department at the Kiel Institute for the World Economy (IfW). This statistical base effect has “largely evaporated”, if you calculate it out, inflation has even risen further. “Although inflation fell in January, price pressures continued to increase.”
“The series of negative inflation surprises is not coming to an end,” agrees Ulrich Kater, chief economist at Deka-Bank. “First the increase in inflation was underestimated, now the decline is overestimated.” Deutsche Bank has significantly increased its estimate for the inflation rate in 2022 and now assumes 4.2 percent. In the last forecast, the analysts were even more optimistic at 2.9 percent.
Energy prices in particular are driving inflation in Germany further and further. According to the Federal Statistical Office, the price increase for household energy and fuels has even accelerated again and is now at 20.5 percent. In December, the authority had reported an increase of 18.3 percent.
“After the sharp rise in oil prices was the main driver for much of the past year and the prices of fuel and heating oil therefore rose sharply, electricity and gas prices have also risen in recent months and literally jumped up in January “, analyzes the economist Marco Wagner from Commerzbank. The increase in the CO2 tax at the turn of the year also contributed to this, although there was also the opposite reduction in the EEG surcharge from January 1st, but this was only able to “brake the movement, not prevent it”.
Deutsche Bank is now even assuming that energy prices will rise even more this year than last year. The plus will be well over ten percent, the analysts believe in view of the January figures.
Source: Infographic WORLD
After all, the increase in food prices fell back slightly. After six percent in December, it was now five percent in January. The increase in apartment rents was constant at 1.4 percent. Goods, on the other hand, rose in price by an average of 7.2 percent after 7.8 percent in December. “The drivers are significantly higher raw material prices and the rising producer prices due to supply bottlenecks, which are gradually being passed on to consumers.
At the same time, consumer demand remains high despite the recent sharp rise in prices,” says IfW economist Jannsen. Since many consumption options were lost during the pandemic, a financial cushion of around 200 billion euros had accumulated in Germany alone, so that people would initially react less sensitively to the price increases. “Since this phenomenon could be observed worldwide, high international demand should also continue to drive prices up,” says Jannsen.
The decisive question will now be how prices will continue to develop in the coming months. Ulrich Kater from Deka-Bank assumes that the inflation rate will continue to fall over the course of the year, but will remain above two percent. “The longer these high inflation rates persist, the more the economy and financial markets will orientate themselves towards them and make inflation permanent,” says Kater.
Wagner also believes that price pressure should ease over the next few months as material shortages and delivery problems slowly ease. “However, there should be a four in front of the decimal point in the inflation rate until autumn and also in the annual average,” predicts the Commerzbank economist.
Thomas Gitzel, chief economist at VP Bank, hopes that inflation rates will continue to fall over the course of the year because the oil price started to rise almost a year ago, meaning that comparative values for energy prices will also rise in the coming months. “However, the oil prices must not increase further for this,” Gitzel admits. Jörg Zeuner, chief economist at Union Investment, on the other hand, sees the continued high level of uncertainty. “As long as geopolitical tensions persist, they can continue to fuel volatile energy prices,” he says. “That may further delay the fall in inflation.”
Zeuner also believes that an easing of the supply chain problems can have a dampening effect on inflation. “And: The high inflation has not yet led to wage increases to the same extent,” says the economist. “We still don’t see any wage-price spiral in Germany that would endanger price stability.” He therefore does not believe that the European Central Bank (ECB) will raise interest rates this year in order to lower the inflation rate. However, the pressure on the ECB has “hardly decreased” as a result of the January data.
Source: Infographic WORLD
Jannsen from the IfW also shares this assessment. “The pressure on the ECB to change its monetary policy course is increasing,” he analyses. The central bank can tolerate inflation rates of over two percent for a while, especially since they are mainly due to pandemic effects. But he also sees a danger in the persistently high inflation rates. “However, the longer inflation remains at a high level, the more inflation expectations threaten to rise,” says Jannsen. “As a result, high inflation would become entrenched.”
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