According to preliminary statistics issued by the Federal Statistical Office on Thursday, consumer prices in Germany increased by 3.1 percent in 2021.
The rise in the cost of living was mostly driven by rising energy costs and supply bottlenecks.
Inflation in Germany was remained quite low in 2020, at 0.5 percent. Prices had increased by 5.3 percent year over year by December 2021.
After coming in at 5.2 percent in November, German inflation surpassed the 5% threshold for the second time since reunification.
The year 2021 started with yet another inflation surprise: German headline inflation rose to 5.3 percent YoY in December, up from 5.2 percent in November, the highest level since June 1992. Inflation in the HICP fell to 5.7 percent YoY from 6.0 percent in November. Since reunification, German inflation has reached an all-time high of 6.2 percent in the summer of 1992. Inflation for the entire year of 2021 was 3.1 percent, the most since 1993. All of these figures are simply a first guess based on the inflation rates of numerous states in the region.
How high was inflation in Germany?
Since Germany’s reunification in 1990, inflation has reached new highs. Expectations for growth have been reduced amid fears that the Ukraine conflict could wreak havoc on Europe’s largest economy.
Inflation in Germany during the 1920s: what happened?
In the years following World War I, Germany was in a state of crisis. Kaiser Wilhelm II’s monarchy was overthrown in the November Revolution of 1918, when large groups of sailors, soldiers, and workers took control of Germany’s cities, enraged by their living conditions and demanding an end to the war. As millions of German soldiers returned home from the Western Front, they joined the nation’s growing pool of unemployed, some joining the armed forces of far-left revolutionaries, some supporting the new liberal government, and others joining the counter-revolutionaries who wanted the monarchy restored. At least 1.1 million Germans were unemployed by February 1919, a figure that would continue to climb. The streets of most German cities saw waves of revolutionary and counter-revolutionary violence throughout the next few years. The liberal coalition government fought tooth and nail to keep its interpretations of peace, stability, and order in the face of opposing visions for the country given by far-left communists and far-right counter-revolutionaries.
In May 1919, the Treaty of Versailles saddled the new republic (often referred to as the Weimar Republic) with unprecedented levels of war debt, compounding the internal troubles. The victorious Allies were to get reparations worth half a trillion dollars in today’s money. As a form of payback, Germany’s manufactured commodities, cattle, and raw resources such as coal, iron, grain, and lumber began to be expropriated. The Weimar administration continued to manufacture banknotes with minimal backing despite the loss of physical and financial resources. The German currency began to devalue as a result of this process.
Under the weight of these foreign and internal forces, the German economy began to sag. The value of the German mark plummeted as the first repayments to the Allies were made in the early 1920s, and a period of hyperinflation began. In early 1922, one US dollar was worth 160 German marks. The currency would decline to 4,200,000,000,000 marks per US dollar by November 1923.
How bad was post-World War I inflation in Germany?
Following that, during the first half of 1921, German currency remained relatively constant at around 90 marks per dollar. Because the Western Front of the war was mostly fought in France and Belgium, Germany emerged from the war with most of its industrial infrastructure intact, putting it in a better position to become Europe’s dominant economic force following an Allied ultimatum to impose economic sanctions forcing Germany to meet payments.
The first payment was made when it was due in June 1921, and it marked the start of the mark’s fast depreciation, which brought its value down to around 330 marks per dollar. The total reparations demanded were 132 billion gold marks, although Germany was only compelled to pay 50 billion marks at the moment since the reparations had to be paid in hard currency rather than the rapidly depreciating Papiermark.
Germany began buying foreign currency with marks at any price in August 1921, but this simply accelerated the mark’s depreciation, requiring more and more marks to purchase the foreign currency sought by the Reparations Commission.
The mark steadied at around 320 marks per dollar in the first half of 1922. International conferences on restitution were being conducted. J. P. Morgan, Jr., a US investment banker, founded one in June 1922. Inflation burst into hyperinflation, with the mark plummeting to 7,400 marks per US dollar by December 1922, despite the talks’ failure to provide a viable solution. In June 1922, the cost-of-living index was 41; by December, it had risen to 685, a nearly 17-fold increase. Germany was unable to make reparations payments by the fall of 1922.
Germany’s method for paying war reparations was to create large amounts of bank notes in order to buy foreign currency, which was subsequently used to pay reparations, but this technique greatly worsened the paper mark’s inflation. Because the mark was practically worthless by the fall of 1922, Germany was unable to purchase foreign exchange or gold using paper marks. In January 1923, French and Belgian forces occupied the Ruhr valley, Germany’s primary industrial sector, after Germany failed to pay an installment of reparations on schedule in late 1922. Reparations were meant to be paid in goods like coal, and the occupation was supposed to ensure that they were paid.
The German government responded by ordering a passive resistance policy in the Ruhr, instructing workers to do nothing that would aid the invaders in any way. Despite the fact that this policy effectively amounted to a nationwide strike to oppose the occupation, the striking workers still needed financial assistance. The government compensated these workers by printing an increasing number of banknotes, resulting in a flood of paper money throughout Germany, worsening the hyperinflation.
Why was money in Germany worthless?
Due to the effects of the war and the growing government debt, Germany was already experiencing significant levels of inflation. ‘Passive resistance’ meant that less industrial commodities were produced while the workers were on strike, further weakening the economy.
What was Germany’s inflation rate in 1923?
Hyperinflation was one of the key issues confronting Germany’s Weimar republic in its final years. In October 1923, prices doubled in 3.7 days after reaching a monthly inflation rate of about 29,500 percent and an equivalent daily rate of 20.9 percent.
The German papiermark began with an exchange rate of 4.2 per US dollar at the outbreak of WWI and rose to 1 million per US dollar in August 1923, when the country’s gold standard was abolished. By November, that figure had risen to around 238 million papiermarks per US dollar, prompting the creation of a psychological condition known as “Zero Stroke,” after people were forced to transact in the hundreds of billions for everyday items and became confused by the large number of zeros involved.
The government issued a redenomination in response to the rapid inflation, replacing the papiermark with the rentenmark, which exchanged at a rate of 4.2 per US dollar and removed 12 zeros from the papiermark’s face value. Despite the fact that the retenmark effectively stabilized the currency and the Weimar republic lasted until 1933, hyperinflation and the resulting economic stresses aided the growth of the Nazi party and Adolf Hitler, who addressed Germany’s economic condition clearly in Mein Kampf.
Why was Germany more severely affected by the Great Depression?
The recall of US loans, which led Germany’s economy to collapse, caused it to suffer more than any other country. Unemployment skyrocketed, poverty levels skyrocketed, and Germans grew desperate.
Why is Germany’s inflation so high?
The annual increase in the national consumer price index (CPI) was 5.2 percent, the highest since June 1992.
The hike did not surprise the ECB, according to ECB board member Isabel Schnabel, who told ZDF television that the central bank’s earlier predictions had not foreseen such a big jump.
According to Schnabel, the central bank believes inflation peaked in November, so raising rates now would be premature because price increases are expected to reduce gradually next year.
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Inflation in the euro zone is likely to jump to 4.5 percent in November, up from 4.1 percent the previous month, according to preliminary figures released on Tuesday.
Base effects, higher energy prices, a pandemic-related temporary VAT rate in the previous year, and material shortages throughout the recovery are all contributing to the recent spike in inflation.
“A downward trend should be visible in the next months, even though inflation rates will remain rather high,” said VP Bank analyst Thomas Gitzel.
“If there are no second-round consequences,” Gitzel added, “the ECB aim of 2% should already be met again by mid-2022.”
The new statistics startled Commerzbank economist Joerg Kraemer, who said it was a disturbing indicator because seasonally adjusted consumer prices grew exceptionally strongly on the month.
“Moreover, prices are rising across the board; it’s no longer only about energy and a few commodities that have been severely hit by the coronavirus outbreak,” Kraemer noted.
While he acknowledged that inflation will likely fall after the new year due to some unique circumstances, Kraemer claimed that the euro zone had too much money circulating due to significant budget deficits and the ECB’s asset purchases.
“The ECB should let up on the gas pedal, stop buying bonds, and halt its negative interest rate policy,” Kraemer added.