The Federal Statistical Office published its preliminary results on the development of the German inflation rate in November 2021. According to the calculations, the inflation rate measured by the German consumer price index rose further to 5.2 per cent compared to the previous month. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, comments on this matter:

Image of the ZEW Economist Friedrich Heinemann.
ZEW economist Friedrich Heinemann comments on the development of the German inflation rate in November 2021.

“Germany is experiencing the strongest rise in inflation in three decades. But the increase to over five per cent is no reason to panic. The November figure could already be the peak of the inflation surge. The strong downward correction of oil prices and the inevitable new contact restrictions in the fourth wave of the pandemic will quickly have a dampening effect on prices. In addition, a statistical slowdown effect on inflation can be expected from January onwards, as the VAT increase a year ago drops out of the year-on-year comparison. While it is certain that the inflation rate will fall from January, it remains unclear whether Germany will see inflation rates close to the two per cent mark again in the next two years. This will be decided in the upcoming wage negotiations and ultimately also in the ECB Governing Council.”

The Federal Statistical Office published its preliminary results on the development of the German inflation rate in October 2021. According to the calculations, the inflation rate measured by the German consumer price index has risen from 4.1 per cent to 4.5 per cent compared to the previous month. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, comments on this matter:
"The inflation rate is measured year-on-year. This figure is still strongly influenced by the fact that prices twelve months ago were curbed by the temporary VAT cut. In order to assess the current inflation dynamics, it is therefore important to look at the inflation dynamics from month to month. There had even been signs of an easing in recent months. From June to September, prices had stopped rising. This temporary lull came to an end after the summer break; from September to October there has been a strong increase of 0.5 per cent, leaving Germany with a very strong price surge in autumn 2021. This means that hopes of a significantly declining inflation rate in the new year are fading.”

The Federal Statistical Office published its preliminary results on the development of the German inflation rate in September 2021. According to the calculations, the inflation rate measured by the German consumer price index has risen from 3.9 per cent to 4.1 per cent compared to the previous month. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, comments on this matter:

“Inflationary pressure will remain very high until the end of the year. The current double-digit inflation rate of wholesale prices shows that price dynamics are fuelled by global supply shortages. But prices are also rising across all service providers. Even though the rate has already exceeded four per cent, we should not yet begin to dramatize this development. The price surge reflects, first of all, the encouragingly strong and sweeping recovery of the domestic and global economy after the deep dive witnessed in the pandemic. The real test will come from January onwards when the one-off effects from last year’s VAT cut expire. It is safe to say that inflation will then fall again from its current level. However, it is completely uncertain how quickly it will return to a moderate level of around two per cent. This is a question that remains open for 2022.”

The Federal Statistical Office published its preliminary results on the development of the German inflation rate in July. According to the calculations, the inflation rate measured by the German consumer price index has risen to 3.8 per cent, a significant increase compared to 2.3 per cent reported in June. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, comments on this matter.

“The expected sharp increase in inflation has now started. In the next few months, Germany is likely to experience the strongest inflation spike in three decades. Current inflation comes as a consequence of the pandemic and its perturbing effects on the global markets. After demand has been pent up for many months, it is currently meeting a still limited global supply of goods. High pandemic-related costs for service providers and the long-term effects of last year’s temporary VAT cut in Germany are further factors contributing to higher inflation. Although several of these factors are only temporary, the consequences and risks of sharp rise in inflation must not be underestimated.

Assets that yield little or no interest are currently being devalued. The initially only temporarily increased inflation bears the risk of resulting in a wage-price spiral. Though the ECB cannot be blamed for this current price jump, it is now responsible for ensuring that the temporary increase in inflation does not become permanent. However, there are also beneficiaries of rising prices, with the government among the biggest winners. As inflation is currently higher than interest rates on government bonds, the government can effectively reduce its debt burden. Inflation also allows the treasury to count on substantial additional tax revenues, especially from progressive income tax. For German taxpayers, higher inflation will result in a considerable tax increase through the backdoor due to the bracket creep effect.”

The Federal Statistical Office published its preliminary results on the development of the German inflation rate in June. According to the calculations, the inflation rate measured by the German consumer price index reached 2.3 per cent, decreasing only slightly compared to May. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, comments on this matter.

“The view that current inflation is driven by short-term factors is on the one hand correct, but only part of the truth. It is true that an exceptionally sharp rise in import prices and the extraordinary circumstances of the pandemic are pushing inflation up. Yet it is by no means certain that this short-term inflation will disappear as quickly as it came. There are three factors that indicate that there is a risk of a permanent rise in inflation. First, the increase in import prices is not necessarily temporary, as labour costs in China and other emerging markets are rising sharply and steadily. Second, the significant loss of purchasing power that workers in Germany suffer from this inflation is likely to have consequences for the next wage negotiations and increase wage pressure. And thirdly, confidence is dwindling that the European Central Bank will resolutely combat a sustained inflation dynamic. The highly indebted euro states have become too dependent on bond purchases and zero interest rates. There is much to suggest that we should prepare for a longer farewell to the era of very low inflation rates.”

Date

29.11.2021

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