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Global Economy

Annual inflation in 2021 higher than it has been since 1993

Life in Germany has skyrocketed in the past year. According to an initial estimate by the Federal Statistical Office, a sharp increase in energy prices, delivery bottlenecks and the reversal of the temporary reduction in VAT drove annual inflation to 3.1 percent. The Wiesbaden authority last measured a sharper increase in consumer prices on an annual average in 1993, when it was 4.5 percent. In the Corona crisis year 2020, annual inflation was still 0.5 percent.

Higher inflation weakens the purchasing power of consumers because they can then buy less for one euro than before. According to economists, poorer households are particularly hard hit. Because they have to spend a large part of their income on essential goods such as housing or food.

Painstakingly saved loses value

The Federal Ministry of Building is currently working to ensure that recipients of housing benefit receive an increased subsidy for heating costs in summer – in time for the ancillary cost settlement with the costs for the winter. Rising inflation rates are also bitter for savers. Savings with low interest rates lose value as a result.

According to estimates, consumer prices rose by 5.3 percent in December 2021 compared to the same month last year, as the Federal Statistical Office announced on Thursday. In November, the monthly inflation rate, at 5.2 percent, exceeded the 5 percent mark for the first time since the reunification boom in the early 1990s.

Energy prices fuel inflation

Inflation in Europe’s largest economy last year was fueled primarily by the rapid rise in energy prices as part of the global economic recovery after the Corona crisis in 2020.

At the same time, the reversal of the temporary reduction in VAT had an impact: the regular tax rates have been in effect again since January 2021, so goods and services tended to become more expensive year-on-year. In addition, there were shortages of materials and delivery bottlenecks as well as the introduction of the CO2 tax at the beginning of 2021 of 25 euros per tonne of carbon dioxide that is produced when diesel, petrol, heating oil and natural gas are burned. Since the beginning of the current year, 30 euros per ton have been due.

Inflation rate will probably fall only slowly

According to economists, it could take a little longer before the comparatively high inflation rates fall again. They also expect a three before the decimal point in the annual inflation rate for 2022 as a whole. Although the VAT effect does not apply, economic research institutes such as the Ifo Institute and the Institute for the World Economy point to persistent supply bottlenecks that increase production costs.

The rise in energy prices is also likely to fuel inflation further for the time being. “Due to the many long-term contracts with gas suppliers, the sharp rise in natural gas prices is unlikely to reach consumers until the beginning of 2022,” argues the Leibniz Institute for Economic Research in Halle.

ECB is aiming for an inflation rate of two percent

Inflation is an important indicator for the monetary policy of the European Central Bank (ECB). The central bank is aiming for an annual inflation rate of two percent for the currency area of ​​the 19 countries and is at least temporarily willing to accept moderately exceeding or falling below this mark.

According to monetary watchdogs, too, consumers in the euro area will have to live with higher inflation rates for a while longer. Inflation will be high for a while, but will decline over the course of 2022, ECB Executive Board member Isabel Schnabel said in a recent interview: “We are less sure about how fast and how strong the decline will be.”

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