Inflation: Energy prices are rising sharply

The term inflation refers to the devaluation of money (decline in the value of money), which is characterized by a constant increase in the price level for final products (consumer goods, investment goods).

The inflation rate is calculated from the price increase of a basket of goods defined by the Federal Statistical Office. This basket contains a representative selection of various everyday goods and services for which an average consumer or household in Germany spends money throughout the year. It includes, among other things, expenditures on food, clothing, rent, electricity, telecommunications, leisure activities, and raw materials (e.g., gasoline, heating oil), as well as government fees and taxes. The basket is continuously updated to ensure that the price monitoring always reflects the goods most frequently purchased by consumers. The average price development for each type of good is then weighted by the share of expenditure that private households in Germany spend on that type of good. The inflation rate therefore depends not only on how the prices of the products in the basket change, but also on the weighting of the price developments of the individual goods in the consumer price index. The weighting scheme determines the weight of the goods and services in the consumer price index. The weighing scheme is adjusted every five years.

The price development of this basket of goods, i.e., private consumption expenditure, is reflected by the consumer price index. The increase in the consumer price index indicates the inflation rate.

Figures on the inflation rate in Germany, the EU and the world

In 2020, the inflation rate in Germany was 0.5 percent. This placed the German inflation rate slightly below that of the European Union (see Inflation rate in the EU and Eurozone). The price increase in the Eurozone was approximately 0.3 percent during the same period (see also Inflation rates in world regions). The country with by far the highest inflation rate worldwide in 2019 was Venezuela, with a rate of approximately 19,906 percent. The global inflation rate in 2019 was 3.51 percent.

Inflation and Consumer Prices – PDF Download

Price trends essentially reflect the change in the amount of money that needs to be invested to acquire goods and services. Data on price trends in Germany is published by the Federal Statistical Office. The most important indicator of consumer price trends in Germany is the inflation rate. This rate represents the devaluation of money, characterized by a steady increase in the price level of final products (consumer goods, capital goods). Inflation is calculated based on the price development of a defined basket of goods and services for everyday needs.

From a consumer perspective, price developments in energy and raw materials are particularly important, as these in turn have a significant impact on the prices of consumer goods and food. Crude oil prices have been rather volatile in recent years. After rising to an average of US$109.45 per barrel in 2012, the price of crude oil fell to an average of around US$57.72 per barrel in 2020.

The share of consumer spending is determined by price developments in the respective sectors. In 2019, the largest share of consumer spending went to housing – approximately 34.6 percent of a household's total consumer spending that year was allocated to housing, energy, and home maintenance. Prices for building land in Germany have also risen. While a square meter of building land in Germany cost an average of €128 in 2011, the average price had risen to €190 by 2019. Similarly, electricity costs have increased steadily in recent years. The index for the development of electricity prices for households rose from 81 index points in 2000 to 186 index points in 2020.

Cost of living – PDF Download

Living expenses refer to the financial burdens incurred, for example, through rent, utilities, and groceries. Housing, energy, and home maintenance represent the largest single item in the living expenses of private households in Germany. In 2019, housing costs for an average German household amounted to approximately €890 per month. Overall, average private consumption expenditure totaled €2,574 per month.

How much do Germans spend on food?

Spending on food, beverages, and tobacco products totaled €254.88 billion in 2020. This represented approximately 15.5 percent of total household spending in 2020. When considering total spending on food and beverages among European Union countries, Germany ranks first, ahead of France. However, when comparing food consumption as a percentage of total spending, countries such as Romania, Lithuania, and Estonia rank highest in Europe.

How does inflation affect the cost of living?

The cost of living is also dependent on the rate of inflation. The inflation rate in Germany indicates the change in the consumer price index compared to the previous year or month. The Federal Statistical Office calculates the consumer price index for Germany based on a so-called "basket of goods." In Germany, this basket includes around 650 goods and ranges from everyday products such as food (FMCG) or gasoline, to durable goods such as clothing or technical devices, as well as services such as haircuts or cinema tickets. In 2020, consumer prices in Germany rose by 0.5 percent, as measured by the inflation rate.