Why inflation in Germany is declining more slowly than elsewhere

Why inflation in Germany is declining more slowly than elsewhere


If you are looking for the heat on holiday, you will be well served in Spain. And it is also economically sensible to go to the Iberian Peninsula. The purchasing power of the euro earned in Germany is high there. According to the OECD, in June Spain sold 12 percent more for the same money than Germany.

And that should remain so, because the euro is stable in Spain. The European Statistics Office estimates the inflation rate there at 2.1 percent for July. Only in Luxembourg are prices more stable at 2.0 percent. But you get a fifth less for the money compared to Germany – and that with a lack of access to the sea. Spain is and will remain an inexpensive holiday destination.

Lots of industry, high energy demand

A year ago, the inflation rate there was still more than ten percent. Since then, it has gradually fallen, while in Germany inflation has increased much more rapidly. Apparently, the Spanish economy managed far better than the German economy to cope with the interest rates, which have been rising for the past year. Germany’s economy is weakening, while Spain’s national product is growing. The high level of unemployment there is falling significantly.

The energy supply is a major reason for the opposite development: Germany was largely dependent on Russian gas, which led to expensive evasive maneuvers in 2022. Since Germany is an industrial country, the gas problem immediately became a general economic problem. Spain was also burdened by rising world market prices for energy. But Spain has hardly any energy-intensive industry – and thanks to lots of sun and empty spaces, it can produce enormous amounts of cheap solar energy.

It all depends on the shopping cart

Inflation indicates how the price of a basket of goods compiled by statisticians develops. If the inflation rate for July is calculated by the Federal Statistical Office at 6.2 percent, that means: For an average product that cost one hundred euros in July 2022, you now have to pay 106.20 euros. This is why the inflation rate is also called the “cost-of-living rate”.

Due to different methods, there are differences between the data from different statistical authorities. The German statistical office sees the current inflation rate in Germany at 6.2 percent, the European statistical authority (Eurostat) at 6.5 percent. When European countries are compared, one always takes the data from Eurostat.

Different shopping cultures

In order to obtain comparable data, the imaginary basket of goods must be the same for all countries. But private consumers shop differently in Finland than in Malta. In low-income countries, people have to spend a much larger proportion of their money on food than in high-income countries.

Germans, for example, only need 12 percent of their budget for food, while Spaniards need 18 percent. Conversely, people in Spain spend 10 percent of their money on cars, buses and trains. In car-loving Germany, 13.5 percent is used for transport.

The real inflation in different countries is therefore also dependent on the respective consumer habits and needs. In general, it affects people who need their entire income for daily life far more than people who earn a lot and regularly have money to spare.

“A Little Trial and Error”

The European Central Bank is targeting two percent inflation for the euro zone. In July it was 5.3 percent. “It is now the task of the ECB to ensure that the spirit of inflation is securely corked back in the bottle,” says Ulrich Kater, chief economist at Deka-Bank. “That means you have to fight inflation, and that’s also next year. The central banks are doing a good job at the moment.”

Economists expect inflation rates to fall overall. Both the Munich ifo Institute and the Kiel Institute for the World Economy expect inflation to rise by 5.8 percent for 2023 as a whole. Last year it was 6.9 percent.

If the ECB keeps raising interest rates, money will become more expensive. Can you get more goods and services for the same money? At least the purchases should no longer become more and more expensive. “It’s not automatic, where you set something on a fine scale and then a precisely defined result comes out automatically,” says economist Kater, “it’s also a bit of trial and error. The central banks are groping their way to the level that is necessary is to drive down inflation”.


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