Inflation is here to stay

The cucumber has now made it to social media star. Videos and photos on TikTok, Twitter and other platforms show how the long green vegetables are being offered at increasingly absurd prices. In some supermarkets, copies have already been photographed for 3.29 euros. Even the standard cucumber at Kaufland, Rewe, Lidl

The social media vegetable phenomenon is representative of consumer frustration at ever-increasing food prices. While energy costs appear to have been contained thanks in part to government price controls, prices at the supermarket checkout are galloping away.

In February, food inflation was 21.8 percent. That's how much the prices have risen compared to the same month last year. This is an increase from January, when inflation in this category was still at 20.2 percent. Since the start of the all-German statistics in 1992, food prices have never risen so sharply compared to the previous year.

The sharp increase in prices at the supermarket checkout contributed to the fact that, contrary to expectations, overall inflation did not fall in February 2022. Inflation remained at 8.7 percent, as the Federal Statistical Office announced on Wednesday. Analysts had expected a decline to 8.5 percent.

"However, we are seeing a continuous increase in the cost of groceries, which is causing lower income groups to worry more and more when they go to the supermarket," says Christoph Swonke, economic analyst at DZ Bank. Food contributes around ten percent to the so-called "shopping basket", on the basis of which the inflation rate is determined.

This means that one tenth of the price increase of 21.8 percent is included in the total number, so that it pushes the inflation rate up by 2.2 points. Price increases have not only accelerated in the supermarket. In the meantime, services are also becoming significantly more expensive. Services such as travel, education, transport and insurance cost an average of 4.7 percent more than in February 2022.

In January the value was still 4.5 percent, in December it was 3.9 percent. It didn't help that the price pressure on energy was easing significantly. "Inflation is not falling as quickly as hoped," says Jörg Zeuner, chief economist at Union Investment. Inflation has remained at a sharply elevated level since September.

This is bad news for workers too. Their wages rose above average in 2022, namely by 3.5 percent. After deducting the depreciation of the currency, employees were left with a minus of 3.1 percent in their wallets. This was not just the third annual real wage decline in a row. That was also the biggest decline in purchasing power in the post-war history of the Federal Republic. In this constellation, the pending collective bargaining conflicts gain additional explosiveness. Several unions are entering collective bargaining with demands for double-digit wage increases.

This increases the risk of a wage-price spiral for the economy as a whole. There already seem to be second-round effects: Especially in the labour-intensive service sectors, higher labor costs result in higher prices for consumers. These second-round effects are also reflected in core inflation, which is an inflation rate adjusted for volatile energy and food prices.

"The underlying price pressure has probably increased even more recently," says Ralph Solveen, economist at Commerzbank. According to Commerzbank estimates based on the figures available so far, the core inflation rate (excluding energy and food prices) rose from 5.6 percent to 5.8 percent. This indicates that pressure remains on the boiler.

“Companies are passing their higher costs on to consumers, and wages will continue to rise as well. In this respect, we do not expect the core rate to fall quickly,” says Ulrike Kastens, European economist at the investment company DWS. That applies to Germany, but also to the euro zone as a whole.

This increases the pressure on the European Central Bank (ECB) to continue raising key interest rates significantly beyond March. The new figures from Germany and Europe should alarm the monetary watchdogs.

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