Germany’s cautious consumers feel pressure from rising inflation

On Frankfurt’s main shopping street, early Christmas display windows are active to attract passersby. But German consumers, worried about the recent rise in inflation, should be cautious in spending their money.

Maria, a 40-year-old social worker who has stopped buying jewelry and electronics because of the higher prices, said: “I felt it a little bit. “I noticed while shopping with my mother that gold has gone from €1,500 to over €1,700 [per ounce] in just one week. ”

German inflation, as measured by the harmonized index of consumer prices, rose 4.6% in October from a year earlier – the highest level since shortly after the country’s reunification three decades ago. It is widely predicted to exceed 5% by December.

Soaring prices are a sensitive topic in a country where the populace’s approach to money remains haunted by hyperinflation in the 1920s and 1940s that wiped out most German savings. .

The issue is on the agenda for the incoming government – still being shaped after the elections in September – amid criticism of the European Central Bank’s overly lax monetary policies. Europe.

Carsten Brzeski, head of macro research at ING, said: “Germany is a country of savers and the inflation debate involves a debate about people feeling they are being ripped off. robbed by these negative interest rates.” “Some parts of the country suspect the ECB only wants to protect the indebted Southern European countries and doesn’t care about their interests.”

Lyn, a 33-year-old elementary school teacher, said the higher costs of rent and energy are often discussed by colleagues at her school. “I try to shop more carefully now,” she said, adding that the rising cost of living “must be an issue the next government has to address.”

Line chart showing Inflation has hit multi-decade high in Germany

Germany is not alone in facing soaring inflation, that is running at a 13-year high of 4.1% across the eurozone. Prices go up even faster United States, where they rose 6.3% in October from a year ago, the biggest increase in three decades.

As people began to get vaccinated against Covid-19 and the embargo was lifted, consumption and business activity recovered and the supply of many items – from semiconductors to natural gas – had to struggling to keep up with demand, causing prices to rise.

The recovery in energy prices is a big factor in higher inflation. But global supply bottlenecks It also means that there aren’t enough parts – such as semiconductors – to make all the goods people want to buy. This pushed producer prices at German factories up 18.4% in the year to October – the highest level since 1951.

A good example is the shortage of new cars price increase for the older ones. In Germany, the price of used cars has increased by an average of €3,666, or 18%, over the past year to a record high of €24,502 in October, according to AutoScout24, a leading sales website.

“Price is skyrocketing, our purchasing power is fading”, warns Bild, the country’s best-selling tabloid last week. It suggests readers invest in real estate, stocks or precious metals to protect their money from “Madame Inflation” – refer to Christine Lagarde, president of the ECB.

The central bank’s recent policies of negative interest rates and large purchases of government debt have long been criticized and legal challenge in Germany, where rivals warn it carries a high risk of inflation. Now that prices are skyrocketing, those criticisms are mounting.

Otmar Issing, a German economist and former chief executive of the ECB, wrote in the Frankfurter Allgemeine Zeitung last week that the bank was “at its own high risk” by assuming inflation would fall in next and it will be able to continue buying bonds and keep interest rates unchanged. “under the assumption that employees simply accept losses due to real wage inflation”.

Such disappointments were a factor behind Jens Weidmann’s recent decision to step down was chairman of the Bundesbank at the end of December, six years before his term as head of the central bank expired, while warning his staff “didn’t pay attention to potential inflation risks”.

Bar chart of Consumer Prices (percentage change year-on-year) showing higher Inflation in the US and Canada than in Germany

Many Germans keep save in bank deposits, for which they pay almost no interest and which banks increasingly charge fees. The pandemic has only highlighted this trend, as household deposits in Germany increased by 214 billion euros to more than 2.6 billion euros since the crisis began in March 2020.

However, economists say an important explanation for Germans’ anxiety about rising prices stems from their cautious approach to the currency, which makes them more sensitive. with the erosion of their purchasing power.

Only about 15% of Germans invest directly in the stock market, compared with about 55% in the US and 33% in the UK. In addition, less than half of households in Germany own their own home – compared with two-thirds in the UK or the US and eight out of ten in Italy. So while asset prices skyrocketed, many Germans missed out.

The country’s aging population, of which the number of people aged 80 and over increased by 4.5 per cent to 5.9 million last year, is also vulnerable to the corrosive effects of inflation on savings and pensions. .

However, there are several factors that suggest that German inflation will decline next year. One is that the price recovery from last year’s temporary sales tax cut won’t be out of the way for inflation data in January. Limitations announced last week to stem a record surge in coronavirus cases could also have a cooling effect on consumer spending and prices. German retail sales fell 2.5% in September from the previous month.

Furthermore, negotiated wages increased by only 1.5% in the first six months of this year from a year earlier. “We don’t see any widespread wage pressures that could lead to an undesirable wage price spiral,” said Isabel Schnabel, a German economist on the ECB’s board. .

However, Jörg Krämer, chief economist at Commerzbank, has predicted that German wages will increase by 2.5% next year and points to the commitment of political parties that are negotiating to form a new government in Germany. Berlin will increase the minimum wage by a quarter to €12 per hour. . This will also force many companies to raise wages for those close to the minimum wage, he said.

Volker Wieland, a professor at Goethe University in Frankfurt and an adviser to the government, warned that if inflation continues to be high, the German political debate could heat up: “If we have one more In the year of 5% inflation, that will certainly become a topic in the political sphere, and it will be very difficult for the government, say the finance minister or the prime minister, to not react to it. ”

Source link


News7h: Update the world's latest breaking news online of the day, breaking news, politics, society today, international mainstream news .Updated news 24/7: Entertainment, the World everyday world. Hot news, images, video clips that are updated quickly and reliably

Related Articles

Back to top button