The inflation rate in Germany climbed from 3.4% in August 2021 to 4.1% in September, and the Bundesbank assumes that inflation rates in Germany will continue to edge up. “Overall, the inflation rate is likely to rise further at first, before gradually declining in the coming year,” the Bundesbank’s economists write in the current issue of the Monthly Report. One reason for this, they explain, is a base effect owing to the temporary VAT cut in the second half of 2020. Back then, the Federal Government lowered the VAT rate for six months to cushion the economic impact of the coronavirus crisis and reinvigorate the economy. As the inflation rate shows the year-on-year change in the consumer price index, it is now higher because of the comparison with last year’s significantly lower prices owing to the VAT cut. 

According to the report, there was also a weakening of a statistical effect which had distinctly dampened price developments in the preceding two months. The effect stems from a COVID-related fairly major update to a number of weights in the basket underlying the Harmonised Index of Consumer Prices (HICP). These had been adjusted for 2021 to reflect consumption patterns in the previous year. For example, package holidays played a less important role in 2020, which is why their weight was reduced at the turn of the year. The one-off effect will again only dampen the inflation rate slightly this month, according to the report. In November, it will then push the rate up somewhat, before being eliminated entirely in December.

Prices of certain industrial products rising steeply

In the report, the economists also detail specific developments in consumer prices for various goods and services compared with the previous month. Food prices were more or less unchanged in September, they write, and prices for services also went up only marginally overall, mainly because unusually steep price drops for transport services had a dampening effect. On the other hand, the prices of industrial goods excluding clothing and footwear, which normally fluctuate strongly, continued to rise substantially, the economists report. Energy prices picked up, chiefly because crude oil prices were higher again. Crude oil prices were up by just over 6% on the month in September, exceeding their prior-year level by 80%. “By contrast, the continued substantial rise in spot market prices for natural gas probably will not filter through to consumer prices until the start of next year,” the economists note. Longer-term contracts mean that higher prices are passed on to consumers with a delay.

German economy continues to recover

The report states that the German economy continued to recover in the third quarter. Economic activity probably picked up a little more strongly than in the second quarter. The reason for this was robust growth in the services sector – for example, in hotel and restaurant services – which in turn was due to the majority of coronavirus mitigation measures being lifted. However, the economists note that bottlenecks in the supply of raw materials and intermediate goods dampened industrial output. “This prevented an even stronger increase in gross domestic product (GDP),” they surmise. The automotive industry, which is mainly experiencing a shortage of semiconductors, is especially affected. In the current quarter, growth in aggregate activity will probably be significantly weaker, according to the report. The robust momentum in the services sector is likely to subside considerably. A certain level of pandemic-related precautionary measures will probably remain in place for the time being. Moreover, the manufacturing sector is likely to continue to suffer under supply shortages, the economists contend in support of their assessment. Economic output will therefore probably continue to fall short of its pre-crisis level (from the fourth quarter of 2019) in the autumn. According to the report, GDP growth is also likely to be much smaller in 2021 as a whole than predicted in the Bundesbank’s June projection.