Inflation in Germany continues to decline. In November the rate was 3.2 percent, the Federal Statistical Office reported in its first estimate on Wednesday. This is the lowest value since August 2021. For comparison: in October prices rose by 3.8 percent compared to the same month last year. In September it was 4.5 percent. At its peak in October and November 2022, the inflation rate was over ten percent.
According to the statisticians, the 4.5 percent decline in energy prices compared to the same month last year had a particularly dampening effect on the inflation rate in November 2023. “In addition, food prices in November 2023, at 5.5 percent, did not rise as much as in the previous months compared to the same month last year.”
The economic research institute Ifo expects inflation in Germany to continue to fall. The inflation rate is likely to rise temporarily to around four percent in December, said Ifo economics chief Timo Wollmershäuser on Wednesday. “But at the beginning of next year the inflation rate will fall to below three percent,” predicted the expert.
However, the gradual decline in inflation cannot hide the fact that low-income households in particular are under severe financial strain. Prices are not falling back to the level of three years ago, and higher wages cannot always neutralize the entire surge in inflation. Nevertheless, there is good news for employees. Real wages rose for the second time in a row, as the Federal Statistical Office also announced on Wednesday.
The increase in nominal wages of 6.3 percent exceeded the increase in consumer prices of 5.7 percent in the third quarter. This resulted in a real wage increase of 0.6 percent compared to the same quarter of the previous year. The first slight increase in two years was recorded in the second quarter. According to statisticians, the increased minimum wage and the inflation compensation bonus agreed in many companies also contributed to the strong increase in real wages. The strongest nominal wage increase of 10.3 percent among full-time employees was recorded by the fifth with the lowest earnings. Part-time employees also achieved an above-average increase of 7.7 percent in the third quarter compared to the same quarter of the previous year.
In the fight against inflation, the European Central Bank increased the key interest rate from zero to 4.5 percent within 15 months. The monetary authorities recently decided against further increases. The high interest rates are having an impact, prices are falling on the real estate markets. Fewer and fewer people can afford a home loan. The commercial real estate market is also suffering. Given the weak economic data in the euro zone, some are already calling for key interest rate cuts to be made soon. But ECB President Christine Lagarde recently made it clear that key interest rate cuts are not expected in the next few months.
Lagarde is already warning against too much euphoria
The Frenchwoman warns against premature victory celebrations in the fight against inflation. This is not the time to start declaring victory, Lagarde told the European Parliament’s Economic and Monetary Affairs Committee in Brussels on Monday. The European Central Bank (ECB) must continue to act on sight in its interest rate policy. “We must continue to closely monitor the various forces impacting inflation and remain firmly focused on our mandate of price stability,” she said. The ECB’s next interest rate decision is due on December 14th. The central bank is aiming for an inflation rate of two percent in the medium term.
The monetary authorities are concerned about the still high core inflation. Here, strongly fluctuating prices for products such as energy and food are ignored in the calculation. Core inflation is considered a more persistent and therefore more dangerous form of inflation. Core inflation in Germany was 3.8 percent in November, according to the Federal Statistical Office – 0.6 points above general inflation. In the euro zone, core inflation in October was 4.3 percent, also well above the overall inflation rate of 2.9 percent.
“If core inflation had remained close to two percent and general inflation at up to ten percent, as we have seen, then the ECB would not have been nearly as alarmed and would not have raised interest rates so much,” says Sebastian Dullien , chief economist at the union’s own Hans Böckler Foundation. If core inflation takes hold, general inflation will also remain high because much of the basket of goods is not energy and food. In the long term, one must assume that inflation will adjust to core inflation – not the other way around. “This is also why the central bank pays so much attention to this,” says Dullien. And that is why looking at core inflation will be more important than looking at overall inflation in the coming months.