Germany’s soaring energy prices force government to promise aid

German inflation remained close to multi-decade highs at the end of last year, forcing the government to promise aid for poorer households as energy prices continued to surge at double-digit rates.

The annual pace of price growth in Germany was 5.7 per cent in December, according to the harmonised index of consumer prices published on Thursday. That was down slightly from 6 per cent in November, which was the highest level since shortly after the country’s reunification in the early 1990s.

German energy prices were 18.3 per cent higher than a year earlier.

Christian Lindner, Germany’s finance minister, said the new government was considering providing financial aid to offset rising heating costs for poorer households this winter.

“We have to do something,” Lindner told a meeting of his Free Democratic party in Stuttgart. “I promise that, with the means I have available, we will provide such solidarity-based support for the people who are particularly affected.”

France, Spain and Italy have already pledged to take similar action.

Spiralling prices are a sensitive subject in Germany, whose approach to money is still haunted by the hyperinflation of the 1920s and 1940s that wiped out most people’s savings.

Economists expect German inflation to fade this year as the effect of the country’s pandemic-driven temporary cut in sales tax disappears from the data. This should automatically knock about 1 percentage point off overall price growth from January, they estimate.

“Because many of the special factors and the imbalance between supply and demand should at least weaken in the course of 2022, we expect the inflation rate to decline to a little under 2 per cent by the end of the year,” said Jörg Zeuner, chief economist at Union Investment.

However European wholesale natural gas prices almost doubled to record highs in the run-up to Christmas and they jumped again this week after supplies from Russia slowed. Global supply chain bottlenecks have also caused delays and higher costs for manufacturers, pushing up the price of many consumer goods.

Record order backlogs at German manufacturers show no signs of easing after new orders outstripped economists’ expectations by rising 3.7 per cent in November, rebounding from a fall in the previous month thanks to higher demand from foreign customers.

Improvement in the country’s labour market is likely to add to upward pressure on costs, because of rising shortages of workers and the government’s promise to raise the minimum wage by a quarter to €12 per hour.

The German employment agency said this week that job vacancies increased by 213,000 last year to 794,000. The jobs website Indeed said the number of German vacancies it was advertising had risen almost 50 per cent from pre-pandemic levels.

“Inflation is unlikely to come down in a straight line from here,” said Carsten Brzeski, head of macro research at ING, pointing out that the price of almost half of the 92 largest components of the German inflation basket rose 4 per cent or more in December — up from only 10 per cent a year ago.

Food prices were up 6 per cent, services prices rose 3.1 per cent and rents increased 1.4 per cent.

Over the course of past year, German inflation averaged 3.1 per cent, its highest level since 1993 and up from 0.5 per cent in the previous year when the pandemic caused a deep recession. The Bundesbank recently raised its 2022 inflation forecast from 1.8 to 3.6 per cent.

Eurozone inflation figures due to be released on Friday are expected to show a dip from 4.9 per cent in November to 4.7 per cent in December. But this is still close to a 13-year high — and more than double the European Central Bank’s 2 per cent target.