🌈 A quick taster for you:
- The German inflation rate is at its highest level for 28 years.
- Germany is hoping to boost consumption.
- Calculate your own personal inflation rate.
🧐 Why do I care?
"We don't like to talk about money." That’s what people say. Yet we tend to talk about money all the time — especially when prices start rising. The inflation rate in Germany has been at 4.5% since October. If that hasn’t already knocked you off your chair then sit tight! We'll explain what inflation actually is, and who it really affects.
🔍 What exactly is happening here?
The inflation rate indicates how prices have changed compared to the same time last year. Prices? Which prices? All prices? Good question! The prices that are considered are the so-called ‘basket of goods’, and this aims to reflect the consumption habits of the average person. It includes things like rent payments, electricity, petrol, food, and also things like the price of a haircut. All the normal everyday stuff! With an inflation rate of 4.5%, if you paid €1000 for your living expenses in November 2020, then those costs will have risen to €1045. Take a look at your own monthly expenses and you might notice this increase!
- Why is there inflation?
The European Central Bank is aiming for an inflation rate of 2%. But why? Their goal is that we all continue buying and spending money. Because when we spend money, we stimulate the economy — and the increased demand for goods means that companies earn more money and employ more people. Which in turn puts money back into people’s pockets. So the ECB wants us to spend rather than save. They don’t want us to save, which is exactly what would happen if there was a negative inflation rate (AKA deflation!). If we all knew that things were about to get cheaper then we’d all wait before we buy that new flatscreen TV, or a new bike. And if everyone stopped spending then the lower demand would mean that companies produce less, and therefore also employ fewer people. At least that's the theory, which is why the ECB aims for slight inflation.
- Inflation going sky high
Germany set itself a new benchmark in October, as its inflation rate rose to the highest level in 28 years! This will affect some people more than others. You might be wondering why it’s currently so high. Well, you might remember that last year, between July and December, VAT was reduced from 19% to 16% and from 7% to 5%. That meant that the prices we paid last year were already significantly cheaper than they are this year. Another price driver is energy, which has become over 18% more expensive than last year. The reasons for this are complex: Germany is very dependent on foreign countries for energy, and those countries set the prices. There’s also a new CO2 tax to take into account, as well as the fact that crude oil was cheaper last year due to the Corona crisis. The combination of all these factors is what has led to the current high rate of inflation.
- Stay tuned: We will discuss the effects of hyperinflation in an upcoming issue of The Briefing.
🤓 What does this mean for me?
Before you panic about everything getting more expensive, take a little look at the basket of goods that’s used to calculate the inflation rate. Rising petrol prices might not even affect you if you travel everywhere by bike! And the food items used to calculate inflation might not actually be ones that you like to pop in your trolley when you’re in the supermarket. So have a look at the list, and see what things might affect your monthly budget.
If you’d like to calculate your own personal inflation rate, you can do so via The Federal Statistical Office over here.