In its latest Monthly Report, the Bundesbank assumes that inflation rates in Germany will continue to rise. According to its experts, this is partly because a one-off statistical effect (see Monthly Report 02/2021), which is continuing to have a similarly strong dampening impact in August as it did in July, will weaken distinctly in September and October and then turn slightly positive in November. This effect, resulting from the significant change made to the weight used for package holidays in the HICP basket at the turn of 2020-21, will ultimately be eliminated entirely in December. The Bundesbank’s economists write that inflation is likely to stabilise again, to a marked extent, in early 2022 – mainly because the price-driving base effect caused by the temporary reduction in VAT rates in the second half of 2020 will then cease to apply. Even so, the experts estimate that the inflation rate in Germany could remain above 2% up to mid-2022.

Consumer prices already saw a marked rise in the second quarter and in July of this year. According to the Bundesbank’s experts, prices went up in all major components of the Harmonised Index of Consumer Prices (HICP). It appears that price increases at the earlier stages of the pricing chain, which were caused not only by robust demand but also by bottlenecks along supply chains, were passed on to consumers to a considerable extent through higher prices for industrial goods. Another potential factor here is that, after reopening, businesses charged higher prices in an attempt to recoup some of the losses incurred as a result of having to close due to the pandemic. In addition, due to the pent-up demand on the part of consumers, it was relatively easy to push through higher prices, the Bundesbank’s economists write. Prices for accommodation in Germany or for restaurant visits went up markedly in June, for example. However, according to the Monthly Report, the increase in prices for services was also driven by air travel and package holidays, where prices still had to be largely estimated due to the restrictions that continued to be in force at the time.

Economic output in Germany set for strong expansion in third quarter

The report also discusses developments in the domestic economy. According to the Bundesbank’s experts, economic output in Germany is set for strong growth in the third quarter of 2021, at a rate that will far surpass the growth recorded in the previous three months. The main reason for this is the considerable easing of containment measures from mid-May, which is having a stronger and, in particular, more prolonged impact in the current quarter than in the previous one. “The main sectors to benefit from the loosening of restrictions are services sectors that were hit especially hard, such as hotel and restaurant services, travel services and parts of the bricks-and-mortar retail sector,” write the Bundesbank’s experts. They also note that while order books in industry and the main construction sector are well filled, industry was unable to tap these in the second quarter because bottlenecks in the supply of some intermediate goods tightened once again. In the meantime, there are initial signs that these supply bottlenecks are at least not worsening as significantly as before. All in all, note the Bundesbank’s experts, it remains to be seen whether GDP will reach its pre-crisis level in the third quarter already or whether this will be a fourth quarter event. There is, they point out, uncertainty surrounding the further economic impact of the pandemic. “For example, the Delta variant and vaccination slowdown could result in tighter restrictions being reimposed.” However, this could then be expected to weigh more heavily on the economy in the fourth quarter, they explain.