ZEW Economist Friedrich Heinemann on the Inflation Figure

In March 2022, the Federal Statistical Office published its preliminary results on the progression of the German inflation rate. According to the calculations, the inflation rate measured by the German consumer price index continued to climb from 5.1 per cent in February to 7.3 per cent in March. Professor Friedrich Heinemann, head of ZEW Mannheim’s “Corporate Taxation and Public Finance” Research Unit, provided the following explanation:

“That inflation continues to accelerate is the result of a classic supply shock. As food and energy become less available, prices will inevitably rise. Inflation rates in the coming months will require level-headed responses. The situation demands that policymakers adopt a clear communication strategy. It must be conveyed that the war in Ukraine is making us all poorer and a loss of purchasing power is economically unavoidable. It is wrong for the German government to pretend that the state can offset all the losses of its citizens with its diffuse aid programmes. The targeted assistance for low-income households included in the aid package is to be welcomed, but across-the-board elements of the plan are superfluous, such as energy cost subsidies for the entire workforce. During the COVID-19 crisis, German fiscal policy was not sufficiently targeted. In the current energy crisis, such an approach is far too expensive and must not be repeated. If it is, we will end up largely financing the high energy prices by accruing further government debt. That would be fiscally absurd.”

“Labour-Cost-Driven Inflation Is Only Just Gaining Momentum” (May 2023)

The Federal Statistical Office published its preliminary results on the development of the German inflation rate in May 2023. According to the calculations, the inflation rate measured by the German consumer price index has fallen even further, dropping from 7.2 per cent in April to 6.1 per cent in May. Professor Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim, has commented on this matter:

“Germany and the eurozone are still grappling with inflation, which remains over four percentage points higher than the European Central Bank’s inflation target of two per cent. Those who are hoping for a swift return to price stability following the decline in inflation might be premature in their optimism. Although food prices are currently experiencing a slight decrease, and the Deutschland-Ticket is reducing local transportation costs, we are only just witnessing the beginning of an inflation driven by higher labour costs in many service sectors. During the summer months, consumers will keenly feel this in the prices of tourism-related services. Despite the peak of inflation caused by the war being behind us, there are no indications yet of a return to price stability. This spells trouble for the economy as the erosive impact of inflation on purchasing power persists.”

“The Flywheel of Inflation Continues to Vigorously Turn” (April 2023)

In April 2023, the Federal Statistical Office published its preliminary results on the progression of the German inflation rate. According to the calculations, the inflation rate measured by the German consumer price index continued to fall from 7.4 per cent in March to 7.2 per cent in April. Professor Friedrich Heinemann, head of ZEW Mannheim’s “Corporate Taxation and Public Finance” Research Unit, has commented on that matter:

“As expected, the base effect is now causing the inflation rate to fall further. Since it has been more than a year since the beginning of the war, the resulting massive price jump has now fallen out of the annual comparison. In addition, energy prices are decreasing again, which has a cushioning effect on inflation. However, there has been no relief from the core inflation rate thus far. Core inflation is calculated without the inclusion of food and energy prices and has recently continued to rise even further. In other words, the initial impulse that set the flywheel of inflation into motion has come to an end. The flywheel continues to turn vigorously for the time being, however.”

The Federal Statistical Office published its preliminary results on the development of the German inflation rate in February 2023. According to the calculations, the inflation rate measured by the German consumer price index remained at 8.7 per cent in February, the same as in January. Professor Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim, has commented on this matter:

“Following the anniversary of the Russian invasion of Ukraine, inflation will fall more significantly from now on. In statistics, the anniversary represents the base effect. Henceforth, the current price level will be compared to the previous year’s level that was already affected by the outbreak of war. The downward trend that is certain to begin in March says little about the long-term dynamics of inflation – and thus provides little information. Trends in inflation expectations are more important from now on. And these are still clearly above the pre-war level, even on a two-year horizon. Trust in future price stability in the eurozone continues to be shaken.”

With a delay, the Federal Statistical Office published its preliminary results on the development of the German inflation rate in January 2023. According to the calculations, the inflation rate measured by the German consumer price index only increased slightly, from 8.6 per cent in December to 8.7 per cent in January. Professor Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim, has commented on this matter:

“The relatively small increase at the beginning of the year shows that the big inflation surge has reached its peak. With the turn of the year many service providers usually adjust their price lists; one-year contracts are often renewed at the start of the year. Many companies had not passed on increasing costs by then but have done so now. In this regard, last year’s extreme price shock is still reverberating. However, the fact that energy and food prices are stabilising will have a dampening effect on prices for goods and services.  Over the next few months, the inflation rate in Germany and the Eurozone will decline more sharply. “However, anyone who takes this as an opportunity to warn the European Central Bank against further interest rate hikes suffers from a distorted perception. Even the drop in inflation that can be expected from now on does not change the fact that the ECB is still well short of its two per cent target.”

The Federal Statistical Office published its preliminary results on the development of the German inflation rate in December 2022. According to the calculations, the inflation rate measured by the German consumer price index fell from 10.0 per cent in November to 8.6 per cent in December. Professor Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim, has commented on this matter:

“The decline in inflation at the end of the year is primarily driven by three factors. The gas price cap has relieved private households of their gas payments in December. The lower oil price reduces the price of fuel and heating oil. In addition, the euro rising in value has made imports into the eurozone less expensive. The ECB is partly responsible for this first small success in the fight against inflation. By raising interest rates, the ECB has helped the euro to recover against the dollar. Nevertheless, a return to price stability is not yet possible this year. In Germany, inflation is no longer limited to energy prices, but now affects almost all goods and services. And measures like the gas price cap ultimately only treat the symptoms.”

The Federal Statistical Office published its preliminary results on the development of the German inflation rate in November 2022. According to the calculations, the inflation rate measured by the German consumer price index fell slightly, from 10.4 per cent in October to 10.0 per cent in November. Professor Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim, has commented on this matter:

“The fact that energy prices are stabilising at a very high level is slowing down inflation somewhat. Nevertheless, there is not the slightest reason to sound the all-clear. We are still far from a return to price stability in accordance with the European Central Bank’s inflation target of two per cent. Besides energy, the inflation dynamic has long since spread to almost all other goods and services. Even if recent wage settlements do not fully offset very high inflation, they will keep cost pressures on businesses high and will not allow inflation to return towards the two per cent mark next year.”

The Federal Statistical Office published its preliminary results on the development of the German inflation rate in May 2022. According to the calculations, the inflation rate measured by the German consumer price index recorded another significant jump from 7.4 per cent in April to 7.9 per cent in May. Professor Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim, has commented on this matter:

“Inflation will soon reach its peak. From the middle of the year onwards, the inflation rate will fall for statistical reasons alone, because the strong price increases of the first half of 2021 will then disappear from the year-on-year comparison. The temporary reduction in energy taxes on petrol and diesel will also have a dampening effect on prices for the next three months. However, this foreseeable decline in inflation should not be misunderstood to mean that the situation will ease in the long term. Germany and the eurozone are still very far from reaching the ECB inflation target of two per cent. Consumers must be prepared for prices to continue to go up as many intermediate products remain in short supply and wholesale prices continue to rise dramatically. The surprisingly positive labour market data also indicate that the dreaded wage-price spiral could soon pick up speed in Germany as well. The inflationary processes are about to become entrenched.”

The Federal Statistical Office published its preliminary results on the development of the German inflation rate in April 2022. According to the calculations, the inflation rate measured by the German consumer price index recorded a slight increase to 7.4 per cent. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, has commented on this matter:

“The high double-digit inflation rates in wholesale and import prices show that much more inflation is in the pipeline. The devaluation of money has long since ceased to be an abstraction, but is very clearly felt in people’s everyday lives. This also increases the risk of a recession, because private consumption, as an engine of growth, could falter in the face of strong inflationary uncertainty. The ECB is not responsible for the current price surge as a result of Russia’s war. Nevertheless, it has a responsibility to offer a credible strategy for a price-stable future. A quick exit from bond purchases and a timely first interest rate hike are inevitable.”

“Labour Market Hinders Return to Price Stability” (July 2023)

The Federal Statistical Office published its preliminary results on the development of the German inflation rate in July 2023. According to the calculations, the inflation rate measured by the German consumer price index fell only slightly, from 6.4 per cent to 6.2 per cent. Friedrich Heinemann, head of Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim and professor at Heidelberg University, has commented on this matter:

“While countries like Spain have already regained price stability, the German inflation rate still remains well above the ECB’s two per cent target. The main hindrance to a faster return to stability is now Germany’s job market, where competition for workers is driving up wages and, in turn, prices. Most new collective bargaining agreements this year include substantial wage increases, with many surpassing at least five per cent, plus special payments. These substantial wage increases will be passed on, leading to further price hikes in the next two years. In this situation, it is especially important for fiscal policy to continue easing the pressure and systematically roll back all remaining crisis measures.”

“Decline in Purchasing Power Prevents Recovery of Private Consumption” (August 2023)

The Federal Statistical Office published its preliminary results on the development of the German inflation rate in August 2023. According to the calculations, the inflation rate measured by the German consumer price index fell only slightly, from 6.2 per cent to 6.1 per cent. Friedrich Heinemann, head of Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim and professor at Heidelberg University, has commented on this matter:

“Inflation in Germany is proving to be persistent. The slight decrease during the summer is disappointing. The expected decrease in the core inflation rate, which excludes energy and food, has not materialised at all. This can be attributed to the enduringly high inflationary pressure driven by wages within Germany. This is also evident in the detailed analysis of the inflation data. While food and energy prices are gradually decreasing again, Germany’s households are still facing unabatedly high price increases in other goods, and especially services. Inflation is currently even in double digits for services like handyman work, package holidays, or the costs of nursing homes. Consequently, the decline in purchasing power tangibly affects the majority, prominently evident and perpetuating a sense of uncertainty regarding dwindling prosperity. Such a development undermines the notion that private consumption could promptly underpin economic resurgence.”

“After the Loss in Purchasing Power, Wage-Driven Inflation Sets In” (November 2023)

The Federal Statistical Office published its preliminary results on the development of the German inflation rate in November 2023. According to the calculations, the inflation rate measured by the German consumer price index fell from 3.8 per cent to 3.2 per cent. Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim and professor at Heidelberg University, has commented on this matter:

“The November figure, at 3.2 per cent, is already well below the inflation peak of almost nine per cent at the beginning of the year. However, a comparison with this inflation peak distorts the perspective. 3.2 per cent is still a clear deviation from the ECB’s target, and the core inflation excluding energy and food is still almost four per cent. The inflation-induced loss of purchasing power, which has been accumulating for over three years now, should not be overlooked either. These losses are now putting intense pressure on wage negotiations, from rail and public services to the industrial sector. This is why the phase of wage-driven inflation is now setting in. Despite all the progress, there is still a long way to go until price stability is achieved.”

“Good Start to 2024 for Greater Price Stability” (January 2024)

The Federal Statistical Office published its preliminary results on the development of the German inflation rate in January 2024. According to the calculations, the inflation rate measured by the German consumer price index fell from 3.7 per cent to 2.9 per cent. Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim and professor at Heidelberg University, has commented on this matter:

“The significant drop in inflation at the beginning of the year marks a positive start to 2024 for greater price stability. This decline from December to January was not to be taken for granted, given challenging factors such as the end of the reduced VAT rate in the restaurant sector and routine price adjustments at the beginning of the year. However, the risk of an inflation setback is not fully eliminated, as indicated by the ongoing aggressive wage disputes.”

[Translate to English:] „Schlechte Konjunkturmeldungen sind gute Nachrichten für die Preisstabilität“ (Februar 2024)

The Federal Statistical Office published its preliminary results on the development of the German inflation rate in January 2024. According to the calculations, the inflation rate measured by the German consumer price index fell from 2.9 per cent to 2.5 per cent. Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim and professor at Heidelberg University, had the following to say on the matter:

“In the second month of the year, the inflation rate has made an encouraging and strong move towards price stability. There are currently two conflicting effects in price statistics. Inflation in wages and services is still driving up prices, while significantly lower energy prices compared to the previous year are having a price-reducing effect. It is unclear which side will gain the upper hand in the coming months. This is not yet cause for celebration, since core inflation (excluding food and energy prices) remains stubbornly at 3.4 per cent. Under these circumstances, bad news for the economy is ultimately good news for price stability. The more the labour market cools down and the labour shortage decreases, the more moderate wages and costs will develop over the course of the year. And that’s what could finally pave the way for a return to stable inflation below the two per cent mark.”

“Purchasing Power Rises, Interest Rates Fall” (March 2024)

In March 2024, the Federal Statistical Office published its preliminary results on the progression of the German inflation rate. According to the calculations, the inflation rate measured by the German consumer price index fell from 2.5 per cent to 2.2 per cent. Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim and professor at Heidelberg University, has commented on the matter:

“Not only in Germany is the inflation rate declining. In the other two major eurozone countries, Italy and France, the European Central Bank’s two per cent inflation target has either already been reached or is within sight. This development has two consequences, both of which are positive for the economic outlook. Firstly, purchasing power is increasing almost everywhere in the eurozone. In Germany, for example, pension increases this year are expected to be a substantial two percentage points above inflation. Secondly, the path for ECB interest rate cuts will be clear from June onwards. This is good for investments. However, savers need to act quickly to secure higher interest rates for a longer period now, as soon the terms for savings accounts will noticeably decrease.”