- Inflation means a broad increase in consumer prices for goods and services for an extended period of time, resulting in a persistent rise in the general price level.
- Consumer prices for energy and food, in particular, are currently surging, but price pressures have become significantly more broader-based.
- Uncertainty surrounding further developments is great and risks to inflation are tilted to the upside – due, above all, to Russia’s war on Ukraine.
When the prices of not only individual goods increase but consumer prices rise across the board over a prolonged period of time, economists call this inflation. In May 2022, the inflation rate in Germany as measured by the Harmonised Index of Consumer Prices (HICP) rose to 8.7% (8.1% in the euro area). On an annual average for 2022, HICP inflation is likely to amount to 7.1% in Germany, according to the latest Bundesbank projection (see the link below). For the euro area, Eurosystem experts have most recently forecast an annual average inflation of 6.8% for the current year. The inflation rate is then expected to gradually decline again up to 2024, to slightly over 2%. This would still put it higher than the ECB Governing Council’s inflation target of 2% in the euro area over the medium term, however.
The current high inflation rates are chiefly due to the rapid rise in energy and food prices. Energy prices had already climbed steeply prior to the war in Ukraine. In the current Monthly Report, the Bundesbank’s economists write that the war and its repercussions have exacerbated price pressures which were already high anyway. In addition, pressure on prices has become significantly more broadly-based, whilst inflation excluding food and energy in Germany, which stood at 4.0% at last count, is also far higher than the historical average (1.1%).
“Price pressures have even intensified again recently, which is not fully reflected in the present projections,” stressed Bundesbank President Joachim Nagel with regard to his institution’s current projections for Germany, adding that if this development continues, the annual average HICP rate for 2022 could be well above 7%.
Starting next year, inflation in Germany is likely to decline gradually. According to the projections, the HICP rate could contract to 4.5% in 2023 and to 2.6% in 2024.
“Euro area inflation rates won’t fall by themselves,” according to President Nagel.
“Monetary policy is called upon to reduce inflation through resolute action.”