Consumer demand, shortages and other pandemic-related factors are combining to drive up prices. Germans, especially, are sensitive to inflation. But there is no reason to panic just yet, says DW’s Henrik Böhme.
By DW
Oct 01, 2021
If you want to know how currency devaluation works, look at Venezuela. There, money is worth practically nothing. Until Thursday this week, €1 was the equivalent of 4.8 million bolivars.
It gives you an idea of what Venezuelans currently have to pay for a loaf of bread. According to calculations by the International Monetary Fund, the annual inflation rate is likely to be 5,500%.
In August, Venezuela announced it would be slashing six zeroes off its inflation-battered currency and introducing a digital currency, the “digital bolivar” as a means of payment, beginning October 1.
Compared with the rampant hyperinflation in Venezuela, the paltry 4.1% month-on-month increase in prices in Germany seems trifling. But it’s still the highest increase in 28 years, and that’s enough to make headlines and raise existential questions such as “is my money still safe?” “Can I still afford my current life, pay off my house?”
Almost forgotten economic terms such as “imported inflation,” “dangerous wage-price spiral” and even “stagflation” – a stagnating economy with simultaneous inflation – are suddenly being bandied around. A phenomenon that was thought to be dead is back.
Fear of losing savings
It’s important to provide context. Germans’ fear of their money losing value is deeply etched into collective memory. It includes the bitter experiences of hyperinflation in 1923 as a result of the World War I, the currency reform after the World War II in 1948 and reunification in 1990, which left many East Germans, especially, unable to convert their entire assets into deutschmarks.
In addition, in 2002, Germans had to deal with the loss of the beloved and strong D-Mark to the euro, which had to be shared with countries like Italy or Greece that had a comparatively relaxed attitude to fiscal discipline.
The reasons for the current high inflation are obvious. The list is long and has mainly to do with the COVID-19 pandemic. First, there is the extremely low inflation rate of last year, the return to the previous VAT rate, which had been lowered because of the coronavirus and a dramatically large surge in demand around the world to catch up on investments that were canceled because of the pandemic.
Global growth has caused oil and gas prices to rise exponentially, and in Germany the new CO2 tax is making energy prices even more expensive. As if that were not enough, a disruption in global supply chains means there’s a shortage of goods and that is also driving up prices.
Higher prices battering entire system
As a result, everything that Germany has to import is also becoming drastically more expensive. Compared to last year, natural gas prices have risen by a whopping 178%, iron ore by 97% and coffee prices by a third. This is what is behind “imported inflation.” Companies have been forced to pass on the higher prices to their customers if they do not want to suffer losses themselves.
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Read More: DW – Opinion: Inflation spooks Germans, but there’s no need to panic – yet
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