August preliminary data: inflation close to 28-year high

Inflation in Germany has risen to its highest level since December 1993. Above all, energy prices are increasing sharply. Inflation should continue to rise in the coming months.

The inflation rate in Germany is expected to be plus 3.9 percent in August 2021 compared to the same month of the previous year. This is announced by the Federal Statistical Office (Destatis) according to preliminary data. A higher value for the inflation rate was last determined in December 1993, when inflation was 4.3 percent. According to Destatis data, prices stagnated from July to August of the current year. Destatis will publish the final results for August 2021 on September 10th.

Inflation has been fueled by rising energy prices for months. Compared to the same month last year, the data show that they increased by 12.6 percent; food prices climbed 4.6 percent. Services rose below average at 2.5 percent, as did apartment rents at 1.3 percent.

The reason for the high rate of inflation is also a so-called base effect, because the withdrawal of the temporary VAT reduction is noticeable. In order to stimulate consumption in the Corona crisis, the federal government had temporarily reduced VAT from July 1, 2020 to December 31, 2020. The regular VAT rates have been in effect again since January 2021, so goods and services tend to be expensive again.

Is there a threat of a wage-price spiral?

According to experts, inflation should continue to rise: Bundesbank President Jens Weidmann, for example, expects the rate of inflation to move towards the end of the year in the direction of five percent. Experts estimate that it will only give way again in 2022. Higher inflation weakens the purchasing power of consumers because they can then buy less for one euro than before.

Economists are currently discussing the possibility of a wage-price spiral. This is how the reciprocal relationship is described when wage and price increases trigger a chain reaction due to adjustment reactions by trade unions and companies.

Collective wages do not keep pace

However, the wage increases of the millions of employees in Germany are currently not keeping pace with rising inflation. Collective wages rose in the second quarter from April to June by an average of 1.9 percent compared to the same quarter of the previous year, as the Federal Statistical Office also announced today. If special payments such as corona bonuses are excluded, the increase was only 1.4 percent. In contrast, consumer prices rose much faster during this period, rising by 2.4 percent.

According to the union-affiliated Institute for Macroeconomics and Business Cycle Research (IMK), the rate of inflation in the full year 2021 is likely to be an average of 2.5 to 3.0 percent, while collectively agreed wages should only increase by around two percent.

“The pending collective bargaining will not change that much, because the resulting wage increases only affect a limited part of the workforce and are also likely to take effect in the coming year,” said IMK Director Sebastian Dullien.