A glimmer of hope for consumers in Germany, after constant price increases in recent years: based on provisional data for the month of March, confirmed by the German Statistical Office, annual inflation stands at 2.2%. This is the lowest rate since May 2021.

According to the head of the Office for National Statistics, Ruth Brand, “energy and food price developments are holding back inflation for the second consecutive month. Last March most food items were cheaper than a year ago, which was the first time since February 2015.” The biggest decrease is recorded in fresh vegetables (-20.1%). However, prices are still galloping in other food items, such as fruit (+4.2%) and confectionery (+8.4%). “Champion” in the rise in prices remains, once again, olive oil (+54.1%).

Worryingly, core inflation, which excludes food and energy prices, remains at 3.3%. Does this mean that the decline in prices is more of a temporary phenomenon?

“The age of panic is over”

Ulrich Kater, chief economist of Dekabank, estimates that the big wave of increases is receding. “The panic about the development of inflation that prevailed years ago has passed – and rightly so,” Katter points out to the German News Agency (dpa-AFX).

In this year’s forecasts, Germany’s largest economic institutes estimate that inflation will range from 2.3% this year to 5.9% in 2023. “It is rather unlikely that food prices will return to 2020 levels,” says Sascha. Merle, researcher at the IfO Institute in Munich.

Speaking to the economic magazine Handelsblatt, Sebastien Dullien, director of research at the trade union-affiliated Institute for Macroeconomics and Economic Development (IMK), agreed with the assessment that inflation is easing. He notes, however, that this seems like an oxymoron, if we consider that “currently, the fiscal policy being followed is driving prices upwards”. Prominent examples are the withdrawal of the ceiling on energy prices, the increase of the compensation fee for CO2 emissions and the reinstatement of the higher VAT rate on catering, which had been reduced during the pandemic period.

For catering and tourism professionals, all this has consequences. According to a recent announcement by the German Hotel and Restaurant Association (DEHOGA), 75% of businesses in the sector have already raised prices in the last three months, while only 3% have the ability to absorb the increase in costs.

Kai Hudetz, director of the Institute for Retail Research (IfH) in Cologne, is more restrained in his assessment of a decline in inflation. “The era of dramatic price increases is over,” he points out. “However, increases in energy and logistics prices are now entrenched and will not be withdrawn…”

The consumer reacts

However, it seems that consumer psychology also contributes to the decline in inflation. Kai Hudetz points out that the German consumer is determined to react to rising prices.

“Many are changing their consumption habits and shopping more often at discount supermarkets, whose turnover will increase by 10.3% in 2023,” he says. “Even a small difference in price prompts the consumer to choose a different product or even a different supermarket, which forces industry and retail to react…”