The inflation rate in Germany rose significantly in July.

As the Federal Statistical Office announced on Thursday after an initial estimate, consumer prices rose by 3.8 percent compared to the same month last year.

This is the highest monthly inflation rate since 1996, the start of harmonized measurement in Europe.

Christian Siedenbiedel

Editor in business.

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Economists spoke of a real “price jump”, as it had already happened at the beginning of the year.

At the end of last year, monthly inflation rates in Germany were negative and prices fell on average.

With the turn of the year that had changed.

In June the inflation rate was last at 2.3 percent, in May at 2.5 percent.

Travel, gastronomy, energy

Economists justified the recent jump in prices, among other things, with the effects of VAT. This was reduced last year due to the pandemic for the months of July to December and was increased to the old level again at the turn of the year. For this reason, since July of this year, to calculate the inflation rate, the prices from 2021 with higher VAT have been compared with prices from 2020 at a lower tax rate. This effect alone accounts for at least one percentage point in the inflation rate, says the economist Holger Schmieding from the Hamburg-based bank Berenberg.

In addition, three other inflation drivers can be seen from the more detailed figures on consumer prices in North Rhine-Westphalia: the first factor is crude oil prices. Last year the oil price had fallen sharply because the oil demand was quite low due to the lockdown. Since then, oil has become significantly more expensive again. This was the main cause of the rise in gasoline and heating oil prices. But the introduction of a CO2 price for climate protection in Germany has made fuels even more expensive compared to 2020, but this effect is less. Compared to the same month last year, the prices for mineral oil products rose overall in North Rhine-Westphalia by 32.8 percent and for fuels by 29.1 percent.

The second factor is that citizens can travel more again.

That is also noticeable in the prices, says Schmieding.

While package tours in North Rhine-Westphalia were 5 percent cheaper in June than in the previous year, this discount fell to just 0.5 percent in July compared to the previous year.

The third factor is that some service providers have used the reopening after the lockdown to raise their prices with the higher demand.

"The citizens want to go back to the restaurants and bars," says Schmieding.

Accordingly, the prices for restaurant services in North Rhine-Westphalia rose by 4 percent in July compared to the previous year, after only 2.1 percent in June.

Bundesbank President Jens Weidmann expects the inflation rate to move towards the end of the year in the direction of 5 percent.

"Here, however, there are mainly temporary effects at work," Weidmann told the FAZ

Loss of purchasing power for employees

For many workers, high inflation means a real loss of purchasing power.

The wages of millions of employees with a collective agreement will rise more slowly than consumer prices in 2021 for the first time in a decade, according to the collective bargaining archive of the union-affiliated economic and social science institute (WSI).

Taking into account the contracts concluded in the first half of the year and the increases agreed in previous years for 2021, collectively agreed wages are likely to increase by an average of 1.6 percent, which is significantly less than prices.

“In the coming year, however, the trend will probably be reversed,” write the economists at DZ Bank. Many of the pandemic-related effects that are currently driving inflation should then wear off.

The European Central Bank (ECB) recently revised its inflation target and is now aiming for 2 percent inflation in the monetary union in the medium term. So far, the goal had been "below, but close to 2 percent". For a transitional period, she also accepts that this target will be exceeded. ECB board member Fabio Panetta now told the Italian newspaper Corriere della Sera that the central bank may have to let the economy in the euro area run hot in order to guarantee price stability: "In the past, impatience has led the ECB to raise interest rates prematurely, which is excessive Maintained downward pressure on inflation and slowed growth. "