Despite inflation’s challenges, consumer purchasing power has improved significantly over the decades, with expectations for continued growth this year. While spending habits have become more cautious, historical data shows that people can buy more today than in the past. Technological advancements and rising wages have contributed to this trend, although some categories, like fish, have seen price increases. Predictions indicate wage growth, which could lead to increased disposable income, benefiting various sectors, despite concerns about future inflation rates.
Despite the challenges posed by inflation, the purchasing power of consumers has shown a positive trend over the past several decades. This year, it’s anticipated that this trend will continue to improve.
Many individuals are now more cautious about their spending habits, often scrutinizing every expense. The persistent rise in inflation has contributed to increasing prices; however, an analysis of historical data reveals that consumers today are able to acquire significantly more with their money compared to previous generations.
For instance, in 1960, it took more than 339 hours of work to purchase a black-and-white television. In contrast, today, one can buy a modern flat-screen TV equipped with internet connectivity and high-resolution display after working just 24 hours on average. This trend extends to various categories including technology, home appliances, clothing, and groceries.
The Impact of Technological Advancements on Prices
“Historically, we have witnessed substantial growth in purchasing power. In fact, it has tripled since 1960. A shopping basket that once required an hour of labor to afford can now be earned in just 19 minutes,” states Christoph Schröder, an income policy expert at IW Köln.
This remarkable increase in purchasing power can largely be attributed to advancements in technology and rising wages. In sectors where technological progress has been most pronounced, the increase in purchasing power has been most significant. “Wages have risen because our productivity has improved. Today, goods are produced in larger quantities, at a quicker pace, and with less effort compared to the past,” Schröder elaborates.
When compared to EU standards, Germany ranks fifth in terms of purchasing power improvements, which the study authors regard as ‘relatively unproblematic.’
Factors That Affect Purchasing Power
Only a few categories have experienced a long-term decrease in purchasing power, with fish being a notable example. “Fish prices have risen due to overfishing, meaning there are fewer fish available to catch. Consequently, one must work longer today to afford a cod than in 1960,” explains Schröder.
Additionally, certain services, like haircuts, have seen a decline in purchasing power due to stagnant productivity, even as wages have increased. The notion that everything was cheaper in the past holds true only in specific cases; in many instances, we are able to afford more today than we could in the 1960s.
It’s also worth noting that parental allowances have not seen an increase since 2007, leading to a significant decline in purchasing power for parents.
The Reality of ‘Perceived’ Inflation
The belief that many items were more affordable in the past is understandable, according to Schröder. This is because individual experiences of inflation often diverge from general inflation trends. “Products purchased frequently, such as bread rolls, butter, or cafeteria lunches, can skew perceived inflation, unlike infrequently purchased items like televisions,” he explains. There have been periods, particularly between 2020 and 2022, where inflation negated wage increases.
It wasn’t until 2024 that wages began to outpace price increases again. While prices rose by an average of 2.2 percent, nominal wages grew by 5.3 percent, resulting in a real wage increase of just over three percent, driven by inflation compensation bonuses and negotiated wage hikes.
Looking Ahead: Predictions for Wage Growth
Although the tax-free inflation bonus is set to conclude at the end of 2024, wages are projected to increase this year, according to Clemens Fuest, president of the ifo Institute. “We anticipate wage growth between four and five percent on average, with the service sector potentially seeing even higher increases,” he states.
Chris-Oliver Schickentanz, an investment strategist at Capitell Asset Management, shares a similar outlook, noting that labor shortages in the service sector will compel companies to offer higher wages to attract employees. “I expect to see stronger wage growth in this area,” he adds.
Rising Purchasing Power and Increased Consumption
In tandem with rising wages, some products may soon become more affordable. Many German manufacturers feel the pressure to reduce prices in light of international competition. “Made in Germany” must remain competitive against products from China and Asia, which could potentially temper price increases.
For consumers in Germany, these developments are promising. If wages grow at a faster rate than prices, individuals will likely have more disposable income, leading to increased investment and spending. This could benefit sectors such as construction and retail.
However, Fuest emphasizes the importance of trust in job security and continued wage growth. “If people believe they will continue to earn well and maintain their jobs, they will be more inclined to spend. Otherwise, they may choose to save,” he warns.
Future Projections for Inflation
The progression of inflation this year will be crucial. The European Commission forecasts that Germany’s inflation rate will hover around 2.1 percent in 2025 compared to the previous year. However, unexpected factors like tariffs or a sudden spike in insurance premiums could disrupt these estimates.
Schickentanz presents a different perspective, expressing concern that the days of inflation rates beginning with ‘1’ may be over. “I anticipate inflation rates will range between two and three percent in the coming decade,” he suggests. Should this scenario materialize, the growth in purchasing power may be more limited in the long run.
This analysis was originally reported by tagesschau24 on January 7, 2025, at 09:00 AM.