Germany’s annual inflation rate last month soared to its highest level in more than 70 years due to high energy and food prices.
The Consumer Price Index rose 10.4 percent in October from 10 percent in September, confirming preliminary figures.
“The main causes of high inflation continue to be enormous price increases for energy products, but prices are also increasing for many other goods and services,” said Georg Thiel, president of Destatis. “Rising food prices are now particularly noticeable for private households,” he said.
Germany, which is Europe’s largest economy, is expected to be the worse performer in the European Union (EU) next year, as it was heavily dependent on Russian natural gas before the war in Ukraine.
Natural gas and electricity prices have soared after Russia reduced supplies to Europe, causing energy prices to skyrocket and leading to rising inflation.
Imports of Russian gas was used for heating, electricity, and industrial processes in Germany and the rest of the economic bloc.
Commodities and Service Costs Skyrocket
The German economy is expected to contract by at least 0.4 percent in 2023, according to government statistics, after only witnessing 1.4 percent growth this year.Energy prices surged 43 percent from 2021, due to the effects of the war in Ukraine and continuing supply-chain issues, while food prices rose 20.3 percent.
The price of goods were 17.8 percent more expensive compared to last year, while service costs rose 4.0 percent.
Meanwhile, consumer prices rose 11.6 percent annually in October, according to European Union’s Harmonised Index of Consumer Prices (HICP) standards, a rise from 10.9 percent from the previous, in line earlier estimates.
The HICP’s inflation rate is expected to rise to 7.1 percent on average by the end of this year, according to the projections of the Bundesbank, Germany’s central bank.Monthly average consumer prices in Germany jumped 0.9 percent in October, which was expected.
German Economic Advisors Suggest Reforms to Alleviate the Crisis
A panel of five economic advisers to the German government said that it must reduce energy relief measures to avoid inflation growth, which is hurting households and businesses.The advisers recommended that as much relief should be provided only to companies and families who cannot cope with high energy prices.
The panel also said that those in the top income tax bracket should have their taxes raised or alternately have a energy-solidarity tax imposed on them.
They were also critical of Finance Minister Christian Lindner over his plans to reduce “cold progression” increases, under which income tax brackets are not adjusted for inflation.
Although it said that compensating for cold progression was a positive reform to the tax system, the plans should be postponed for now due to the inflation crisis, said Achim Truger, a member of the panel.
They said that the German government should focus on providing targeted relief for lower and middle-income groups, while not overspending on the budget.
Pressuring the ECB to Act on Inflation
The advisers believe that it is crucial for the European Central Bank (ECB) to be more resolute regarding rate hike announcements so it could get inflation under control.The ECB has been raising interest rates to reduce inflation in the eurozone below 2 percent.
Rising prices have been suppressing economic growth in Germany and have affected future financing and investment.
“The trick is to raise interest rates with a sense of proportion in order to fight inflation without causing an excessive slump in the economy,” said Ulrike Malmendier, a panel member.
They concluded that Germany’s energy supply needs to be expanded and diversified, while encouraging consumers to conserve use.
