Germany’s cautious consumers feel the pinch from surging inflation


On Frankfurt’s main shopping street the early Christmas window displays work hard to entice passers-by. But German consumers, worried about a recent surge in inflation, are cautious about spending their money.

“I have felt it quite a bit,” said Maria, a 40-year-old social worker, who had put off buying jewellery and electronics because of higher prices. “I noticed when shopping with my mum that gold has gone up from €1,500 to over €1,700 [per ounce] in only one week.” 

German inflation, as measured by the harmonised index of consumer prices, rose 4.6 per cent in October from a year earlier — its highest level since shortly after the country’s reunification three decades ago. It is widely expected to exceed 5 per cent by December.

Spiralling prices are a sensitive subject in a country where people’s approach to money is still haunted by the hyperinflation of the 1920s and 1940s that wiped out most Germans’ savings.

The issue is rising up the agenda for the incoming government — still being formed after September’s election — amid criticism of the European Central Bank’s ultra-loose monetary policies.

“Germany is a country of savers and the inflation debate is connected to the one about people feeling they are being robbed by these negative interest rates,” said Carsten Brzeski, head of macro research at ING. “Some parts of the country suspect the ECB just wants to protect indebted southern European countries and not to look out for their interests.”

Lyn, a 33-year-old primary school teacher, said the higher cost of rent and energy was often discussed among colleagues at her school. “I try to shop more carefully now,” she said, adding that the rising cost of living “should be an issue for the next government” to tackle.

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

Germany is not alone in confronting soaring inflation, which is running at a 13-year high of 4.1 per cent across the wider euro area. Prices are rising even faster in the US, where they increased 6.3 per cent in October from a year ago, the biggest jump for three decades.

Once people started being vaccinated against Covid-19 and lockdowns were lifted, consumer and business activity rebounded and the supply of many items — from semiconductors to natural gas — struggled to keep up with demand, driving up prices.

A rebound in energy prices is a big factor behind higher inflation. But global supply bottlenecks also mean there are not enough parts — such as semiconductors — to produce all the goods people want to buy. This pushed up producer prices at German factories by 18.4 per cent in the year to October — the highest level since 1951.

An extreme example is the way shortages of new cars have boosted prices for older ones. In Germany, used car prices have on average risen €3,666, or 18 per cent, in the past year to a record high of €24,502 in October, according to AutoScout24, a leading sales site.

“Prices are skyrocketing, our purchasing power is melting away,” warned Bild, the country’s top-selling tabloid newspaper last week. It suggested readers invest in property, shares or precious metals to protect their money from “Madame Inflation” — a reference to Christine Lagarde, president of the ECB.

The central bank’s recent policies of negative interest rates and buying vast amounts of government debt have long been criticised and subject to legal challenges in Germany, where opponents warned it risked runaway inflation. Now prices are surging, those criticisms are growing.

Otmar Issing, a German economist and former ECB executive, wrote in the Frankfurter Allgemeine Zeitung last week that the bank was “exposing itself to a high risk” by assuming inflation will fall next year and it will be able to continue buying bonds and keep rates low “on the assumption that employees would simply accept the inflation-related real wage losses”.

Such frustrations were a factor behind Jens Weidmann’s recent decision to step down as president of the Bundesbank at the end of December, six years before his term as the head of the central bank expires, while warning his staff “not to lose sight of prospective inflationary dangers”.

Bar chart of Consumer prices (annual percentage change) showing Inflation is higher in the US and Canada than in Germany

Many Germans keep their savings in bank deposits, on which they are paid almost no interest and for which banks increasingly charge them fees. The pandemic only accentuated this trend, as German household deposits increased by €214bn to more than €2.6tn since the crisis started in March 2020.

But economists say an important explanation for German anxiety about rising prices stems from their conservative approach to money, which makes them more sensitive to an erosion of their purchasing power.

Only about 15 per cent of Germans directly invest in the stock market, compared with about 55 per cent in the US and 33 per cent in the UK. In addition, fewer than half of German households own their own home — against two-thirds in the UK or US and eight out of 10 in Italy. So while asset prices have been soaring, many Germans have missed out.

The country’s ageing population, in which the number of people aged 80 or over rose 4.5 per cent to 5.9m last year, is also vulnerable to the corrosive effect of inflation on savings and pensions.

There are, however, several factors suggesting German inflation will fade next year. One is that the rebound in prices from last year’s temporary cut in sales tax will drop out of the inflation data by January. Restrictions announced last week to contain a record surge in coronavirus cases could also have a cooling effect on consumer spending and prices. German retail sales already fell 2.5 per cent in September from the previous month.

Furthermore, negotiated wages rose only 1.5 per cent in the first six months of this year from a year earlier. Isabel Schnabel, a German economist on the ECB board, said last week: “We do not see any widespread wage pressure which could give rise to an undesirable wage-price spiral.”

Yet Jörg Krämer, chief economist at Commerzbank, has predicted that German wages will rise 2.5 per cent next year and pointed to a commitment by political parties negotiating to form a new government in Berlin to raise the minimum wage by a quarter to €12 per hour. “This will also force many companies to raise the pay of those close to the minimum wage,” he said.

If inflation stayed high, the German political debate was likely to heat up, warned Volker Wieland, a professor at Frankfurt’s Goethe university and adviser to the government: “If we had another year of 5 per cent inflation that would certainly become a topic in the political arena, and it would be difficult for the government, say the finance minister or chancellor, not to react to it.”


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