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When will Germany’s rising cost of living slow down?

German consumer prices are increasing at record rates, leading to worries about a repeat of the so-called 'stagflation' of the 1970s. Why are experts worried - and when will inflation become more stable?

A customer in a supermarket hands over a €5 note.
A customer in a supermarket hands over a €5 note. Prices are going up for many products in Germany. Photo: picture alliance/dpa | Moritz Frankenberg

What’s happening?

It’s something most of us are noticing almost every day – whether it’s increasing prices at the supermarket or at the gas station. 

After years of German inflation barely moving, Russia’s invasion of Ukraine has quickly pushed up German consumer prices.

In April, inflation hit a 40-year high rate of 7.4 percent, driven largely by higher energy costs. At the same time though, the government has slashed its 2022 growth forecast from 3.6 percent in January to just over 2 percent now. German economists say neither problem is likely to go away soon.

READ ALSO: Five ways Germany’s soaring inflation could affect your life

Has inflation ever increased like this before?

Experts are worried about a phenomenon that happened in the 1970s occurring again in Germany.

When high inflation and low growth go together, economists call it stagflation. A mix of the words “stagnation” and “inflation,” it describes the toxic mix of a slowing economy, possibly with more people losing their jobs – at the same time as the cost of living goes up.

Managing director of the Munich Ifo Institute, Clemens Fuest, told Bavarian broadcaster BR24: “With stagflation, goods become scarce. In this case, it is mainly energy that is in short supply, and this drives up prices. And the only way politicians can react to this is by giving targeted aid to those who are hardest hit, which is then borne by everyone together.”

A German receipt. Prices have been rising intensely in recent months.

A German supermarket receipt. Prices have been rising intensely in recent months. Photo: picture alliance/dpa | Karl-Josef Hildenbrand

In the early 1970s, tensions over the Yom Kippur War led to Middle East embargoes that pushed oil prices up abruptly, leading to stagflation.

At first, oil prices rose by 70 percent and then by 300 percent at its peak. Inflation rose to seven percent in Germany, which was heavily dependent on oil from the Middle East. Car-free Sundays and speed limits on German roads followed.

However, the economy stopped growing and within two years unemployment figures rose significantly. Companies passed on their increased costs to consumers, who in turn demanded higher wages, which the trade unions then implemented. This led to the a wage-price spiral.

In Germany, the Bundesbank reacted relatively quickly with a restrictive monetary policy – it raised interest rates. Inflation fell to 2.7 percent by 1978 before shooting up again in the early 1980s. Unemployment also peaked at 9.1 percent during this period. During the 1980s, the economy recovered and had growth rates of 2 to 3 percent.

In the USA, on the other hand, inflation rose to 20 percent and could only be brought down by a radically restrictive monetary policy of the central bank, with an increase in the base rate (the central bank’s interest rate) to 20 percent. The result, however, was a deep recession and high unemployment.

READ ALSO: How the cost of living crisis is changing German spending habits

It’s clear that stagflation is difficult to combat in terms of economic policy. In the US, this issue has been discussed recently. 

According to Harvard economics professor and former chief economist of the International Monetary Fund, Kenneth Rogoff, there’s a high risk of this happening due to a perfect storm of struggling economies, the war in Ukraine and worldwide supply issues.

German Finance Minister Christian Lindner has also been warning of stagflation. And the fear is real, according to Ifo head Clemens Fuest.

“In other economic crises, it’s usually the case that demand declines,” Fuest said. “So consumers are worried about the future, they buy less or people become unemployed.

“Then the state can intervene, monetary policy can increase demand. But that doesn’t work here. It is not a lack of demand, but a lack of supply. And that’s why the usual instruments of economic policy don’t work here, the state can’t do very much.”

How long will we see rocketing prices in Germany?

European governments are moving to wean themselves off Russian coal, gas, and oil as quickly as possible – in order to both sanction Russia for invading Ukraine and to stop financing Putin’s regime with European money. But there aren’t enough alternatives to Russia energy in Europe yet, and that’s pushing up energy prices.

At the same time, Ukraine is one of the world’s major producers of key agricultural products like grain and soybean oil. Russia’s blockade of the Port of Odessa has caused grain and soybean oil prices to spike, simply because Ukrainian ships carrying produce to world markets can’t leave safely.

READ ALSO: What to know about the latest price hikes in German supermarkets

Port of Odessa

A freight ship leaves the Port of Odessa. Photo: picture alliance/dpa/Ukrinform | –

Experts say consumer prices will become stable in Germany, but it depends on the world situation. 

Alexander Kriwoluzky, Head of Macroeconomics at the German Institute for Economic Research, told The Local that spiralling inflation is not the “new normal.”

“But I think we will see high prices this year and next,” he said.

Kriwoluzky says determining what effect these events will have on prices is less a matter of when these events end, but how. 

“It could well be that we find different ways of exporting grain out of Ukraine. If the European Union is successful at securing a safe energy supply that doesn’t rely on Russia, we could see prices come down a little then too,” he said.

Aside from the war, Kriwoluzky says China’s zero-Covid policy is also having a knock-on effect on German prices, as strict lockdowns have stalled deliveries and left European companies short of supplies.

Unless China eases its lockdown, possibly through greater vaccination, prices in Germany are likely to keep climbing for a while.

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For members


EXPLAINED: What you need to know about buying property in Germany

Traditionally a tenant-friendly country, Germany has one of the lowest home ownership rates in Europe. Costs to buy are high, but there are some tax advantages for those who choose to buy.

EXPLAINED: What you need to know about buying property in Germany

In the early to mid-2000s, when buyers in countries like the US, UK, and Canada raced against a hot market to snap up homes, German house prices actually fell. That experience has stayed with Germans – even as buying a home in certain cities becomes increasingly unaffordable. Just over half of people in Germany own a home, compared with around 65 percent of people in the UK, and around 75 percent of people in Greece. But even that number hides some pockets where home ownership in Germany is particularly low; in Berlin, less than 20 percent of people own. 

Beyond past experience, costs to buy and sell are steep in Germany, and tenant protections tend to be stronger than in many other countries. Still – for some people, buying in Germany can still come with a few generous tax and investment advantages to make the decision worthwhile.

READ ALSO: The hidden costs of buying a house in Germany 

The drive to buy a ‘forever home’

Experts say Germans generally don’t tend to buy more than one – or even several – homes in their lifetime, unlike some other places. 

“The culture of trading in or flipping isn’t the same here. In fact, there’s plenty of variables which discourage it,” says Nick Mulder, Founder and CEO of Hypofriend, a Berlin-based mortgage broker that specifically serves the expatriate market. 

As an example, Mulder points to the fact that in Germany, you cannot typically prepay your mortgage off until year 10. If you wanted to sell your home before then – perhaps to buy something larger – the contract you have with your bank or mortgage broker will typically require you to still pay the bank the interest they would have otherwise made off you.

Flats in Berlin.

Flats in Berlin. Photo: picture alliance/dpa/dpa-tmn | Zacharie Scheurer

“That gives Germans an inflexible feeling of ‘when we buy we have to buy for the rest of our lives’, says Mulder, adding: “Getting on the property ladder is just not as popular. There is also that cultural risk aversion that comes in more generally.”

READ ALSO: How Germany’s soaring property prices are out of reach for buyers

Several other high fees increase the incentive to buy the right place once, rather than buy to trade it in later. One is the land transfer tax buyers pay after purchasing their home. The exact amount varies by state, but comes in at anywhere between 3.5 and 6.5 percent of the purchase price. 

In addition, a notary must preside over any real estate deal in Germany. During this long process – which can last several hours – the buyer and seller will sit and listen to the notary read out the entire deal, to ensure both sides understand it before signing. The notary will then collect a fee of anywhere between 1.2 to 2 percent. 

Finally, the broker will also collect a fee of a maximum of 7.1 percent, which will be split between the buyer and seller.

“If you compare that to other countries, that’s just an exorbitant amount,” says Mulder.

Mulder adds that it’s less clear in Germany whether buyers should first find the home they want to buy or find a mortgage first, as banks don’t grant pre-approval for mortgages the same way they do in the US. Some places, including his brokerage, may issue a certificate saying how much a buyer can afford, to help make offers more easily.

Buying to let

If you’re not ready to buy your own forever home, many experts say purchasing a place to rent out to someone else is an increasingly attractive option in Germany.

“It is more advantageous, at least tax-wise, to rent out an apartment you own to someone else than to live in it yourself,” says Claudia Müller, Founder of the Frankfurt-based Female Finance Forum and author of Finance, Freedom, Provision – the way to financial independence. “You can, for example, deduct the interest payments on your mortgage off your rental income, reducing your tax burden.”

People have to save for several years to buy a home.

People have to save for several years to buy a home. Photo: picture alliance/dpa/dpa-tmn | Christin Klose

Müller adds that after 10 years, selling a rental property will incur no tax on capital gains – even though the property might not be your principal residence. Meanwhile, a person selling their principal residence pays no capital gains tax after they’ve owned their property for two years.

“If you rent it out, you can claim the respective expenses and any depreciation against the rental income you get. For some investments, there may even be special, higher depreciation rates. Depending on your costs and the rent you receive, the overall result might be negative,” says Dirk Maskow, and independent tax consultant based in Berlin and Düsseldorf. “If that happens, you can offset that loss against your other income, for example from employed or self-employed work.”

“Tax-wise at least, buy to let is a lot friendlier than in some other countries,” says Mulder. “That’s why you’re getting more younger people interested in buying up some small bits of real estate they can rent out.”

READ ALSO: Where in Germany can you still snag a home for under €100k?

What’s next for the German housing market?

As in many place, prices have gone up in Germany and fewer people are able to afford to buy property, with a 10 percent increase seen in recent years.

Mulder says he expects interest rates, or the cost of getting a mortgage, to go up in the next six to 12 months – particularly as Russia’s invasion of Ukraine stokes higher inflation and cost of living.

READ ALSO: How Germany’s property boom could be slowing down

With interest rates in Germany having increased from 1 percent to 3.5 percent, Mulder says banks are getting more selective about who they will lend to, meaning fewer people will be able to afford property. He eventually expects demand to drop accordingly and price increases to moderate – although German property is still likely to increase in value, just at a steadier rate than the major uptick we’ve seen in recent years.

He says to watch out for one major variable that will impact buying behaviour: how German-based companies will view remote work after the Covid-19 pandemic. “If you only have to be in the office one day a week instead of five, you might consider buying in the countryside. If companies are sceptical of remote work, we’ll see people who live in the city who won’t be able to buy.”