German inflation falls to 1.9 percent in August
Published: Thursday, Aug 29th 2024, 14:30
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The big price wave of recent years in Germany is over. Inflation in Switzerland's northern neighbor weakened significantly in August.
Inflation in Germany is falling significantly. In August, consumer prices were 1.9% higher than in the same month last year, according to the German Federal Statistical Office.
According to analyses by the state statistical offices, energy in particular was cheaper than a year ago, while prices for services rose at an above-average rate.
Overall, the price pressure on consumers is therefore decreasing. In July, the statisticians had recorded a 2.3% increase in consumer prices after 2.2% in June and 2.4% in May. In August, prices were 0.1% lower overall than in July. Core inflation excluding energy and food fell by 0.1 points to 2.8 percent.
Economists had already anticipated a trend towards stable prices in the summer. The Munich-based Ifo Institute expects the inflation rate in Germany to remain below two percent in the coming months. This is based on a survey of companies on their price plans published on Thursday.
Consumer spending does not pick up
Inflation has so far weighed on consumers' spending mood. Despite higher wages, many people are continuing to keep their money together. According to the German Federal Statistical Office, private consumption fell by 0.2% in the second quarter compared to the previous quarter.
Consumer sentiment also deteriorated in August, according to the consumer climate study conducted by the Nuremberg-based institutes GfK and NIM. Expectations regarding income and the economy have fallen, as has the propensity to buy, while the propensity to save has risen.
In the longer term, consumers' purchasing power has fallen during the wave of inflation. Although the average household income grew by 5.1% from 2022 to 2023 according to the Federal Statistical Office, the inflation rate was 5.9%. Inflation accelerated rapidly after the Russian attack on Ukraine in early 2022, as energy in particular became much more expensive.
Higher wages
However, Germany's employees have increasingly made up for the loss of purchasing power from the periods of hyperinflation. In the second quarter, the increase in gross wages exceeded the development of consumer prices for the fifth time in a row. The Federal Statistical Office puts the real wage increase for the second quarter at 3.1%.
In view of the strong growth in salaries, private consumption remains the main hope for the German economy, which contracted by 0.1% in the second quarter. Economists expect little improvement in the second half of the year. The German Bundesbank expects only a mini-growth of 0.3 percent for the current year.
Inflation wave has left its mark
The extremely high inflation rates of the past two years are now history. On average for the year, leading economic research institutes expect inflation in Germany to slow significantly to 2.3% - down from 5.9% in 2023.
But consumers are feeling the effects of the sharp rise in prices when shopping or eating out. According to a special analysis by the Federal Statistical Office for the period from January 2020 to May 2024, food prices have risen by more than 30 percent on average in recent years.
The Federal Association of Consumer Organizations is even of the opinion that food prices are like a black box, as the head of the association, Ramona Pop, put it. She called for a new type of observatory at the Federal Agency for Agriculture and Food to analyze the prices and costs of food at the various stages of production and trade.
Falling inflation gives ECB room for maneuver
If inflation in Germany and the eurozone as a whole falls over the course of the year, this would give the European Central Bank (ECB) scope to cut key interest rates. In June, it lowered its key interest rates by 0.25 percentage points for the first time since the wave of inflation. In July, the ECB kept key interest rates stable and left the door open for a rate cut at the Governing Council meeting on September 12.
The financial markets are expecting the ECB to cut interest rates in September. However, inflation also persisted in the eurozone: in July, the rate rose slightly to 2.6%.
In principle, the ECB believes that an inflation rate of 2.0% ensures price stability. Lower rates or even falling consumer prices (deflation) entail the risk that companies and consumers will postpone their investments and purchases because they expect even lower prices. This would have negative consequences for economic growth.
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