F.A.Z. price report: Inflation in Germany has now reached 10 percent. Will wages now follow suit? And: Can the German government be trusted that inflation rates will fall again somewhat next year?
So far, the German government has succeeded at best temporarily in lowering the inflation rate a bit through political intervention. The quarterly F.A.Z. price report shows: With the introduction of fuel discounts and 9-euro rail tickets in June, inflation rates for Germany fell slightly lower for three months – but then rose all the more sharply to 10 percent in September when the political interventions came to an end. Corresponding figures were confirmed by the Federal Statistical Office on Thursday.
Prices are rising across the board. In September, the price of energy was 43.9 percent higher than a year earlier. Prices for light heating oil more than doubled within a year, rising by 108.4 percent, while natural gas was 95.1 percent more expensive. Electricity was 21.0 percent more expensive and fuel 30.5 percent more expensive. Food rose in price by 18.7 percent. “Overall, the upward price trend for this has gradually intensified since the beginning of the year,” the statisticians said. Significantly more expensive were edible fats and oils (plus 49.0 percent) and dairy products and eggs (plus 29.1). Prices for meat and meat products (up 19.5 percent) and for bread and cereal products (up 18.5) also increased noticeably for consumers.
What happens to wages with this inflation
There are two interesting questions here: Will wages rise along with inflation? And: Will it still be possible for inflation rates to moderate again next year?
The demand by the Verdi union and the civil servants’ association for wage increases of 10.5 percent in the public sector could indicate that the unions now also no longer consider inflation to be temporary and are therefore calling for greater wage compensation. IG Metall is seeking wage increases of 8 percent.
“The public sector unions are also demanding more than IG-Metall did some time ago because inflation has continued to rise in the meantime,” said Commerzbank chief economist Jörg Krämer: “In addition, the public sector is not in competition and, unlike the metal industry, is not suffering from high energy prices.”
Of course, it now depends on what ultimately comes out of the collective bargaining, says Frankfurt economics professor Volker Wieland: “But I think we will get significant wage increases.” Even if these do not offset the overall inflation rate, including energy prices, this means that core inflation, i.e. the inflation rate excluding highly volatile prices such as those for energy and food, will continue to get a boost, he says. This could hardly be avoided, as there are labor shortages in many places.
In the euro area as a whole, the core rate of inflation has risen from 3.7 to 4.8 percent over the past four months. “Euro area data show nominal wage growth around 4 percent for the first half of the year,” Wieland says. At any rate, he says, that is above the 3 percent figure occasionally cited by the European Central Bank (ECB) as “consistent with its inflation target of 2 percent.”
On the other hand, it is of course unsatisfactory for employees if wages rise much more slowly than inflation.
The German government is now counting on the gas price brake to lower inflation somewhat in the coming year. It is assuming an inflation rate of 7 percent for 2023.
But there is some dispute among economists about whether government aid will lower or drive inflation in that case. “An expansionary fiscal policy, especially the gas price cap, reduces inflation and does not increase it in this case,” wrote Berlin-based economist and DIW President Marcel Fratzscher on the short message service Twitter. If the federal government subsidizes gas prices, at least to a certain extent, lower gas prices than otherwise flow into the inflation measurement.
Clemens Fuest, President of the Ifo Institute in Munich, says that the gasoline rebate has also slowed inflation in this sense. The difference, however, is that with the gas price brake, a transfer is paid that is independent of current behavior. This has an income effect, people have more money at their disposal. That lets demand for goods rise, which in turn increases inflation: “The overall effect is ultimately unclear.”
Commodity prices fall – because of recession worries
“I share the assessment that inflation will fall significantly next year,” said Karsten Junius, economist at Bank J. Safra Sarasin. But he sees other reasons for this: “We can already observe that supply bottlenecks and freight rates on the world markets are declining significantly.” Accordingly, he said, key commodity prices are falling. “Even for goods where prices have not yet fallen, inflation rates are likely to fall, for example for gasoline, as the percentage price increase of this year will not be repeated,” Junius says.
He is less optimistic about service prices, he says. “There is still some pent-up demand after the pandemic, and labor shortages remain high,” the economist says: “So it will depend a lot on the coming wage rounds whether inflation will sustainably fall back to 2 percent there, too.”
The ECB also wants to fight inflation with higher interest rates. The next interest rate decision is due on October 27. After an interest rate hike of 0.5 percentage points in July and one of 0.75 percentage points in September, ECB President Christine Lagarde has held out the prospect of a further rate hike. Commerzbank expects another 0.75 percentage points.
At least this winter, however, that is unlikely to help fight inflation, ECB Executive Board member Isabel Schnabel recently said in a roundtable discussion with economists Paul Krugman and Larry Summers.