The great wave of inflation has broken, but at the end of the year inflation in Germany increased significantly again. In particular, many consumers are likely to have felt higher food prices directly in their wallets during the Christmas period. The inflation problem has not yet been solved, say economists with a view to the next few months – even if it looks like it will ease in the medium term.
How has inflation developed recently in Germany?
The inflation rate has been rising again for three months now. For December, the Federal Statistical Office calculated a value of 2.6 percent based on preliminary data. The only time last year that consumer prices were significantly higher than in the same month last year was 2.9 percent in January.
In October, the annual inflation rate rose to 2.0 percent after two months of falling values. At 2.2 percent, November brought a value above the two percent mark for the first time since July 2024. Despite the recent increase, inflation in Europe’s largest economy is far from its peak in autumn 2022, when it was 8.8 percent.
What’s next for inflation?
Economists expect that the inflation rate will initially remain above the two percent mark in 2025. Among other things, the increase in the CO2 price for gasoline, heating oil and gas as well as the increase in the price of the Germany ticket are likely to drive inflation. Over the course of the year, economists expect an average inflation rate for Germany of just over two percent and thus at a similar level to 2024. Last year, the annual average inflation rate was 2.2 percent, as the Federal Statistical Office calculated based on preliminary figures.
What are the risks?
According to economists, a trade conflict with the USA could increase inflation. US President-elect Donald Trump has announced high tariffs on imports from Europe. The European Union could respond with countermeasures. The export nation Germany would probably be particularly affected by such a trade conflict. Bundesbank President Joachim Nagel had warned: “With tariff increases we are making consumption more expensive and fueling inflation.”
The chief economist at VP Bank, Thomas Gitzel, also sees high wage demands, especially in the service industry, as a risk for inflation developments in the current year: “The elimination of the inflation compensation premium should now be offset by correspondingly high wage growth, according to the unions’ strategy.”
What is the inflation rate target and why?
The monetary authorities at the European Central Bank (ECB) see their main goal of stable prices and thus a stable currency achieved if inflation in the euro area is 2.0 percent in the medium term.
This value is far enough away from the zero mark. Because persistently low prices are considered a risk to the economy: companies and consumers could postpone investments in the expectation that things will soon become even cheaper. And even if prices rise too much, it is poisonous for the economy: consumers then lose purchasing power because they can afford less and less per euro and prefer to keep their money together.
The Bundesbank expects the inflation rate in Germany to gradually move towards the target of two percent. However, expensive food and services prevent a faster decline. The Bundesbank expects an inflation rate of 2.4 percent in this country for 2025, calculated according to the European method (HICP). “From 2026 onwards, the inflation rate in Germany will gradually reach two percent again,” predicted Bundesbank President Nagel in mid-December.
So lower inflation rates are good for the economy?
In principle yes. Because if people’s daily expenses, for example for food, gas and heating, are kept within limits, consumers have more money for other purchases. This can stimulate consumption and thus boost the economy as a whole.
However, this calculation has not yet worked for the German economy: private consumption is not the engine for the hoped-for upswing; instead, the increasingly tense situation on the domestic labor market and the numerous conflicts around the world are slowing things down. After two negative years in a row, economists only expect the German economy to achieve mini-growth of 0.2 to 0.4 percent in 2025.
How is the inflation rate even calculated?
Employees from the state statistical offices and the Wiesbaden Federal Office record the cost of fruit and vegetables, books and magazines, shoes and furniture in stores nationwide every month. How much does the apartment rent cost? How much does gas cost at the gas station? Thousands of individual prices for goods and services are recorded in a representative manner according to an always the same scheme. Some of the prices are also collected online.
The individual prices are grouped into around 700 types of goods, which form the so-called shopping basket. On this basis, the statisticians calculate the development of inflation. Since consumers do not spend the same amount on clothing as they do on rent, the individual items are weighted differently. The housing item, which includes rents as well as expenses for owner-occupied housing and household energy, has by far the greatest weight.
Federal Statistical Office on consumer prices Eurostat on inflation in the euro area Time series Inflation Germany Monthly values Time series Inflation Germany Annual values Report by the Federal Statistical Office Expert Council on inflation in December and in 2024 as a whole
