In October, inflation in Germany surged unexpectedly, reaching a 2.0% increase in consumer prices compared to the previous year, driven mainly by rising food costs. While package holidays and insurance saw significant price hikes, energy costs declined. Despite wage gains, consumer sentiment remains low, with a higher savings rate indicating cautious spending. Experts predict inflation will average around 2.2% for the year, with reassurances that this spike does not signify a new wave of inflation.
Surge in Inflation Rates in Germany for October
Inflation in Germany experienced a surprising spike in October, with consumer prices rising by 2.0 percent compared to the same month last year. This marks an increase from the 1.6 percent recorded in September, as reported by the Federal Statistical Office based on preliminary data. Economists had anticipated a lower inflation rate of 1.8 percent.
Increased Costs for Services
Consumers are feeling the pinch, especially when it comes to services such as package holidays and various types of insurance, which saw price increases of 4.0 percent compared to October 2023. Food prices climbed by 2.3 percent, highlighting the rising costs in essential goods. Conversely, energy prices decreased by 5.5 percent. When excluding food and energy, the core inflation rate is estimated to have risen to 2.9 percent.
Holger Schmieding, Chief Economist at Berenberg Bank, noted that the noticeable rise in inflation is broad-based. He pointed out that persistent inflation in the service sector, heavily influenced by wage costs, warns against excessive reductions in the European Central Bank’s key interest rates. The ECB has already cut its key rate three times this year, the latest being in mid-October, in response to declining inflation within the monetary union.
Leading business figures have expressed their dissatisfaction with the government’s approach ahead of two upcoming summits of the coalition partners.
Challenges for Economic Growth
Despite earlier drops in inflation this year, consumer spending has not significantly picked up. The GfK consumer climate index indicates some recovery in consumer sentiment for October, though it remains at a low point. Many consumers are choosing to save rather than spend, even with rising wages. The savings rate increased in the first half of the year, reaching 11.1 percent, up one percentage point from the previous year.
This behavior poses a concerning outlook for the already weak German economy, which relies heavily on private consumption, a sector that indeed showed surprising growth in the third quarter. Experts attribute the lack of spending to a long-term decline in consumer purchasing power, exacerbated by inflationary pressures following the Russian conflict in Ukraine, which led to a rapid surge in energy prices.
The Bundesbank had predicted a rise in inflation, particularly in food prices due to recent commodity price hikes. Service sector inflation is also expected to stay elevated for some time, driven by increasing labor costs. The ifo Institute concurs, reporting that businesses in both industry and trade are planning to raise their prices again.
Assurances Against a New Inflation Wave
Despite the current inflation uptick, the German government expects a significant average decrease in inflation rates over the year. Its autumn projection anticipates an inflation rate of 2.2 percent for 2024, down from 5.9 percent in 2023, with an expected inflation rate of 2.0 percent next year. Ulrich Kater, Chief Economist at DekaBank, reassured that this is not indicative of a second wave of inflation, but rather a reflection of the slow rebound in consumption.
Experts suggest that the recent inflation increase stems from a base effect related to energy prices. Crude oil prices rose sharply in September of the previous year only to fall afterward, now influencing current inflation figures. Friedrich Heinemann, an economist at the Center for European Economic Research (ZEW), stated that the rise in inflation has temporarily halted, primarily because high energy prices are dropping out of last year’s comparisons. He predicts a period of stability until year-end.
Even prior to the official report, inflation data from various federal states indicated a rise in consumer prices in regions such as Baden-Württemberg, Bavaria, Hesse, North Rhine-Westphalia, and Saxony, which experienced increases ranging from 1.8 to 2.8 percent compared to the same month last year.