Germany: Soaring inflation will hit the most vulnerable | Business | Economy and finance news from a German perspective | DW | 19.01.2022

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Business

Germany: Soaring inflation will hit the most vulnerable

Germans have good reason to worry about rising consumer prices. With inflation at a 30-year high, it's the country's neediest who will be hit the hardest.

The contents of a grocery cart in a German supermarket

High inflation can mean cutting corners for the poorest consumers in Germany

It's a rainy and cold day in January, not the most pleasant conditions for volunteers waiting under a tent set up outside the Bonner Tafel, a food pantry in the western German city of Bonn. But the cold is ideal for the vegetables and other fresh products they collected earlier from nearby supermarkets. Not quite fresh enough to be sold at market, the random assortment of leftovers will soon be distributed for free to needy locals, including pensioners, young families and unemployed people trying to make ends meet. 

"Locals" should be understood in a very general sense. Some spend up to a four-hour round trip making a weekly trek to the Tafel to collect whatever the pantry can offer them that day.

"We notice that towards the end of the month, when money is getting tight, then they start asking, 'Can I have a bit more?' Then you realize how tight the situation is," Tafel volunteer Günther Giesa tells DW. "And that's when a solid inflation, which isn't compensated for in some other way, becomes worrisome."

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Being poor in one the world's richest countries

Highest hike in decades

Figures out Wednesday showed that consumer prices in Germany went up 3.1% in 2021, the largest spike in 30 years. In December, prices were up more than 5% compared with the same month a year earlier.

This is a stark contrast to 2020, when German inflation clocked in at 0.5%, and significantly higher than the inflation target of 2% the European Central Bank (ECB) has set for the eurozone, where Germany is located.

Consumer prices are exploding in economies around the globe.The high cost of energy is one of the main culprits. Demand for fuel surged as pandemic restrictions were lifted in 2021. At the same time, OPEC+ has stuck with its plan to only gradually restore cuts in output made during the pandemic. With renewable energy sources not developed enough to make up for the gap in demand, a lot of money is chasing limited supplies.  

It's the high energy bills that are pushing up overall production costs, making it difficult to offer competitive prices, manufacturers say. While consumers struggle to keep up with the price hikes, businesses are wondering if they'll be able to keep the lights on.

"Everyone knows that Germany had a thriving textile industry in the 1950s until the business moved almost entirely to Asia because production was cost-prohibitive," Heino Buddenberg, chief technical officer at Waelzholz, a saw blade manufacturer, told reporters in January. "I would really like to avoid such a fate for our industry but I can't rule it out."

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Economics and inequality

A past trauma

Inflation is particularly worrisome in Germany, where purchasing power has evaporated several times over the last century.

In 1923, hyperinflation — brought on after Germany suspended the gold standard and then lost World War I — led to some employers paying out wages on a daily basis. With consumer prices rising every day, workers would collect their wage and rush to go spend it before their money lost even more value. Many turned to bartering services for goods like groceries and coal.

Since then, Germany has suffered through other bouts of inflation, including after World War II and during the energy crisis in the 1970s.

Bread or milk?

For a country that so highly prizes economic stability, the specter of long-term inflation is a major concern. American economist and Nobel Prize winner Robert Shiller has said that even just the fear of a theoretical inflation is enough to have a negative impact on the economy. The latest inflation numbers show that the threat is quite concrete. And those with the least in Germany are likely to be affected the most.

"It's painful for me when I go to the gas station and pay €100 [$113] instead of €80. But these €20 don't hurt me personally as much as €2 does our customers, who are living on a very low income," the Tafel's Giesa explains.

For these people, surprise costs often mean cutting corners. "They have to consider things like, 'Do I want to buy fresh bread or would I rather use that euro to buy a liter of milk?'" Giesa says. "It's not the case that they have a financial cushion. All the money they have, they usually spend. When everything becomes more expensive, that means doing without something."

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Price cap on pork legs

As consumer costs in Germany rise, so does pressure for policymakers to act. The ECB has resisted the idea of countering inflation with higher interest rates, unlike the US Federal Reserve. The ECB sees inflation tied to supply chain issues caused by the pandemic, a phenomenon it believes will be temporary.

Some economists have floated the idea of introducing price controls on consumer goods and services, a policy used after World War II.

"The end of the war required a sudden restructuring of production which created bottlenecks similar to those caused by the pandemic," Isabella Weber, an assistant professor of Economics at the University of Massachusetts Amherst, argued recently in an opinion piece for The Guardian. "Then and now large corporations with market power have used supply problems as an opportunity to increase prices and scoop windfall profits."

Last week, Hungarian Prime Minister Viktor Orban, who is seeking reelection this spring, moved ahead with a national cap on the price of some food products, including sugar, cow's milk and pork legs.

Another option would be to focus on getting more cash into the wallets of those who need it the most, for example by increasing welfare assistance in Germany to compensate for inflation.

Whatever the measure, the priority should be making sure it won't take years to have an effect, says Giesa. "The people need the money today."

Edited by: Hardy Graupner