The Germans have a dismal history with inflation. After World War I, Germany experienced hyperinflation that evaporated middle-class savings, displaced the elderly and the young to abject poverty, and was accompanied by an economic crisis that is still considered one of the main reasons for the rise of the Nazis to power. Ernest Hemingway, as a Canadian newspaper correspondent, described how in the border area the French moved in droves to German territory every afternoon, sabotaging and eating until they exploded, puffing on puff pastry and pastries and paying a few cents before returning to their country enjoying the high exchange rate of the French currency.
The multi-zero banknotes from that period are now items sold in flea markets, but the old German fear of inflation is returning. “Price shock at gas stations,” a Berlin tabloid headline announced this week; “Will even our rolls get expensive soon?” Wondered another newspaper; Customers and supermarket workers complain about soaring tomato prices, and hardware stores are raising prices for parquet and products because of global supply difficulties. “Are we facing a spiral of inflation?” Wondered the headline of the “Build” website.
The reason for the concern is the soaring inflation in the country in the last year. The phenomenon is part of an almost global trend, but one that could have a more serious impact on Germany. The Germans are among the most frugal nations in Europe, the country’s savings rate is second only to Sweden, and many in the country fear erosion in the value of their savings due to high inflation.
Currently, most international economic bodies as well as German economists predict that inflation will fall after peaking in the coming months. They are talking about a temporary increase resulting from a rapid recovery from the corona plague, along with disruptions in world supplies that have also been caused due to dealing with the plague.
The level of anxiety increases with prices
But in the meantime, prices are only rising, and with them the level of anxiety. The consumer price index for September in Germany was 4.1% higher than last year. This is the highest inflation rate recorded in Germany in three decades, and is expected to rise even more. It is estimated that in the coming months the index is expected to jump to 5% or even more, on an annual basis, before falling again.
In addition, the data regarding prices in the wholesale sector are even more worrying. The latest information shows that compared to September last year, these prices (Wholesale Prices) jumped in Germany by 13.2%. The last time such an increase was recorded was in 1974, following the global energy crisis of the early 1970s.
“The sharp rise in prices compared to September 2020 is due in part to the jump in input prices,” the German local CBS explained. Should and avoid recession as a result of dealing with the corona, which artificially reduced prices last year. “The low price base last September also affects the figure for the relative increase,” they wrote. But inflation exists, and is part of a European trend.
Energy is the locomotive that leads the rises
The area leading the price increases is the energy sector. The media estimate that the cost of heating the house this coming winter, will skyrocket for private homes soon to a thousand euros and will amount to hundreds of euros more for apartments as well, if the current high prices continue. At gas stations, the most common price of petrol reached a peak of nearly a decade – 1.63 euros per liter. The price of premium fuels has climbed to over 2 euros at some stations.
Although the German government has so far shown determination in refusing to intervene in energy and fuel prices, unlike the Spanish and Italian governments for example, in recent days the transport minister has called on the government to announce that the price of fuel will be a maximum of 1.99 euros.
Fear of horizontal impact on the economy
The concern is that high fuel prices will have a horizontal impact on the economy, and will further contribute to rising prices. According to estimates by an economic weekly in Germany, which conducted a survey among companies in the country, it will not be possible to avoid further price increases in the coming months. “Many companies have not yet rolled the leap in consumer costs,” it read.
And alongside the historic fear of rising prices, the Germans are returning to past recommendations. Media articles mention the harvest and harvest times of the various vegetables and fruits, in order to avoid expensive out-of-season payment. Some media outlets devote sections to the question of “how to save on inflationary times,” and recommend that readers conduct a comprehensive review of their insurance policies, among other things, to avoid duplication. Others recommend reducing heating and walking around well-dressed homes. This is not good news for the German economy, which, although export-oriented, depends, among other things, on domestic consumption. The very fear of inflation in Germany can be devastating.
The issue of rising prices is also at the top of the agenda in a politically complicated timing. At a hotel in the west of the city, talks have been taking place in recent days about the new coalition that will lead Germany, with the participation of the “green” and liberal parties and led by the Social Democrats. One of the main issues on the table is a demand for a significant expansion of the carbon tax that has been in force in Germany since the beginning of the year. The “Greens” are demanding a threefold increase, but the tax is responsible for some of the rise in fuel prices, and a further increase in it may be a politically difficult step in the current times, despite the commitments of the parties and the mandate given to the fight against climate change.
German memory burns how money lost its value in hyperinflation in the Weimar Republic / Photo: Shutterstock
A resurgence will disrupt forecasts
Germany’s economic research institutes share estimates of the expected decline in inflation. “With the decline of the projected corona plague this spring, and the fact that the effect of the temporary reduction in VAT in Germany last year will expire, inflation should fall soon,” the Commercebank’s chief economist estimated. This is still a significantly higher figure than expected at EU level (2.3% and 1.8%, respectively) – but still tolerable.
But these estimates are based on the fact that the German economy will continue to grow at the forecast rate. Issues such as the re-emergence of the corona plague with the decline in vaccine validity, or paralysis that has already begun in the country’s lucrative car industry due to the lack of chips, along with a possible change in central bank policy, may disrupt these predictions.
In addition, the strong unions in Germany have in recent days begun to demand wage increases to cope with rising prices, which economists say could create a chain reaction of wage increases that will exacerbate inflation. The head of the Ver.di union, which has two million members, called on Thursday for “substantial real wage increases”. Economists estimate that wage increases of more than 3% may start and drive such a process.
Horror stories about families getting off their property
Part of the German fear of inflation stems from historical reasons. Horror stories about families falling from their possessions, wealthy people becoming poor overnight, and disappearing savings being passed down from generation to generation. Until the middle of the previous decade, inflation was the scenario the Germans feared most, according to the results of an annual survey by a local insurance giant. In 2008, 76% of Germans defined inflation as the most threatening issue. Since then, the rate has dropped to 50% in the past year, but it may rise again.
Selling cans on Berlin Street during the period of hyperinflation / Photo: Shutterstock
But part of the German fear stems from very modern reasons: like the low rate of apartment owners in Germany and the fact that about half of the residents live in rented accommodation, which may skyrocket with rising inflation. This is compared to countries in southern Europe (and also Israel) where most residents own property. “If you did not buy a house, it can be very frustrating to think you missed the opportunity, now that inflation is climbing,” economist Peter Boffinger told Bloomberg.
Soaring energy prices in Europe are threatening its economic recovery, and continental governments are helping businesses and residents, the European Commission said this week, in an attempt to address the sharp rise in natural gas, fuel and coal prices on the continent that has called for southern European governments to intervene.
The European Commission has announced that it will consider “concentrated gas purchases” in order to lower costs, but this option is just one of a “toolbox” that also includes government subsidies, designed to protect citizens ahead of the coming winter and businesses recovering from the Corona plague.
“Need urgent help”
In Germany, steelmaker Swiss Steel Group has announced that it needs “urgent government assistance” to cope with the surge in energy prices. The price of a megawatt per hour has jumped from 20 euros three years ago to about 200 euros in recent weeks, the company’s CEO noted, saying “we need immediate assistance.” Manufactures in Germany, which could lead to impacts on various sectors.He also threatened to halt production, noting that other steel companies in Germany are considering the move.At Europe, several large fertilizer companies, as well as a steel manufacturing company in the UK, have already stopped or reduced production significantly.
At the same time, end consumers in Germany are also facing a new reality due to rising prices. The German company E.On, for example, has announced that it will not offer new contracts to customers interested in connecting to its gas transportation network, due to the jump in prices and its inability to predict the price to the consumer. In Germany, the payment for the use of gas in winter is spread over the whole year, and consumers can choose between a fixed price that includes a liability and a variable price that is charged retrospectively. A message on the company’s website clarifies that “at this time it is not possible to connect to the network.”
The government refrained from intervening
The German government has so far avoided measures to reduce energy prices. In Spain, on the other hand, the government has announced that it will work for higher taxation of “surplus profits” of energy companies from higher prices. In France, the government will distribute vouchers worth 100 euros to needy households in favor of paying electricity and heating bills. Italy is also considering spending billions from its annual budget on energy subsidies for industry and citizens.
Next week, EU leaders will convene for a summit that will deal mainly with energy prices. Also on the agenda will be the approval of the natural gas flow from Russia via the Nord-Stream 2 pipeline, which is scheduled to start work this coming spring. Russian President Vladimir Putin has denied that the country is “sending a message” to Europe by reducing supplies before the hearing, and that Gazprom is meeting its legal obligations.