What’s going on?

Everywhere you look in Germany, prices seem to be going up. From hefty back payments on energy bills to huge markups on groceries, the cost of living is much higher than it was a year ago – and it’s affecting almost all areas of life. 

In October, Germany’s inflation rate hit 10.4 percent against the year before, representing the largest jump in consumer prices since 1951. Prices have been rising steeply for almost two years now, triggered by supply bottlenecks during the Covid pandemic and the soaring cost of fossil fuels following Russia’s invasion of Ukraine.

According to the Federal Office of Statistics (Destatis), household energy bills had gone up by 55 percent in October compared to last year, while groceries had gone up by 20 percent and clothes and footwear were up 5.5 percent. 

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All of this has had a huge impact on our behaviour and, in many cases, our standard of living. In fact, a recent survey conducted by EY found that one in two people were only buying life’s necessities at the moment.

Fortunately, a trend reversal could be in sight. According to economists, the stars are aligning for a dampening of inflation in the coming months – and the question isn’t so much if, but when. 

How do they know inflation is set to go down?

According to the experts, there are a number of factors pointing to a levelling out of consumer prices. The first is that producer prices dropped significantly last month.

Producer prices refer to the costs that domestic producers like farmers and manufacturers charge to wholesalers and retailers. In this sense, they have a big impact on the prices that we pay at the till – though there’s usually a lag between producers setting the prices and retailers passing them on to consumers. 

Earlier this week, Destatis revealed that producer prices had gone down by 4.2 percent in October compared to the previous month. This makes October the first month since 2020 when producer prices haven’t gone up.

According to Ralph Solveen, economist at Commerzbank, the latest producer prices “give hope that the peak of the inflation rate for consumer prices is no longer far away either”. 

Jens-Oliver Niklasch from the Landesback Baden-Württemberg also sees the change in producer prices as a good sign. “This is perhaps the first signal of a certain easing of price pressure due to the economic situation,” he told Tagesschau.

Another positive sign can be seen in wholesaler prices, which slipped by 0.6 percent in October. Destatis believes this is largely due a five percent reduction in the cost of petroleum products.

Moreover, a recession appears to be in the cards this winter. The Organisation of Industrialised Countries (OECD), for example, forecasts a decline in German economic output of 0.3 per cent for 2023. According to the International Monetary Fund (IMF), this could apply to large parts of the global economy next year.

One of the consequences of economic recession is that people cut back on spending, which often leads to a dampening of prices. That could have a knock-on effect on the inflation rate in 2023. 

READ ALSO: Fact check: Is Germany heading into a recession next year?

How much could inflation go down by?

There are numerous different estimates on this, with by far the most heartening was put forward by economist Olivier Blanchard. Talking to Manager Magazin this week, the former IMF chief economist said he expected inflation to drop dramatically next year.

“My guess is that by the end of 2023 the inflation rate will be 2.5 to 3 percent,” he said. 

The steep decline could be influenced by the government interventions like the planned cap on gas and electricity prices. This is set to come into force in March 2023 and retroactively relieve both households and small businesses from January.

With high inflation largely driven by energy costs, this kind of assistance could be critical in helping to drive down prices. 

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So, should we popping champagne corks?

Well, depending on the price of champagne at your local supermarket, a mid-range Sekt may be a more appropriate choice. 

That’s because there’s still a fair amount of disagreement about how much inflation is set to go down by, and when. Though producer and wholesaler prices are falling, consumers won’t feel the impact of this – or any of the government aid – for some time yet. And experts say there are still too many uncertainties to know what the future holds.

Pointing to recent agreements between trade unions and employers, Commerzbank’s Ralph Solveen said higher wages could still push up inflation for a little while yet. “With a strong increase in wages, companies are facing additional costs, which they will at least partly pass on to their customers,” he said. 

Joachim Nagel, President of the Deutsche Bundesbank, also believes inflation hasn’t quite reached its peak.  “I think it is likely that the annual average in 2023 will have a seven before the decimal point,” he told Tagesschau. 

Is the European Central Bank doing anything to combat the price hikes?

Yes. Within just three months leading up to November, the ECB raised interest rates by a full two percent – and further interest rate hikes look likely in December.

Economists polled by Reuters believe the ECB is likely to raise rates by 0.5 percentage points at its meeting next month. Currently, the key interest rate stands at 2.0 percent.

Raising interest rates is a standard way for central banks to try and get a grip on out-of-control inflation, though there are some downsides to it, such as an increase in borrowing costs. In Germany, for example, rising interest rates are already being felt in a decline in property purchases as people struggle to afford financing for a new home. 

However, most experts – including Nagel – say rate rises remain an important tool in the battle against the soaring cost of living.

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