2 percent is considered optimal
One thing is clear: inflation that is too high is not good for an economy in the long term and is not wanted. Rising prices lead to economic growth falling because consumers (have to) limit themselves. Then again, companies invest and produce less in order to save costs. The result is a shortage of supply – which in turn can drive up prices. High inflation also means a loss in the value of a currency. This means that goods from abroad, i.e. imports, become more expensive. German companies buy more expensively in non-European countries and have to pass on the higher prices to their customers.
But an economy would not function completely without inflation. A moderate price increase, i.e. a constant but low inflation rate, should ensure sufficient distance from deflation, like a kind of safety buffer. Deflation is basically the opposite of inflation: prices fall and goods and services become cheaper. The consequences: When companies and private households expect falling prices, they initially postpone investments and purchases and the economy comes to a standstill.
As with inflation, the causes of deflation vary. However, deflation is considered more dangerous because it can set in motion a downward spiral that is difficult for politicians to counteract: While central banks can increase interest rates in the event of inflation and thus make money more expensive again, interest rates can only go very slightly below zero sink. It is therefore advisable to prevent deflation from occurring in the first place and to prevent it with moderate inflation.
Low inflation also stimulates economic growth because it is worth spending or investing money. The key is the right size. Economists consider an inflation rate of 2 percent to be ideal for monetary and price stability. This is therefore the declared goal of the monetary authorities at the European Central Bank (ECB).
Inflation calculation: fictitious shopping basket as a starting point
Important to know: The inflation rate is an average value and is calculated in Germany by Destatis, the Federal Statistical Office. The starting point is a fictitious shopping basket, which consists of around 700 products and services, the prices of which fluctuate. The contents of the basket should represent the consumption of an average private household. It includes everyday products such as energy, food, gasoline, clothing and media (newspapers), long-term consumer goods such as cars and electronics, as well as services such as rent, insurance, club memberships, educational opportunities, travel, hairdressing or cinema visits.
In order to measure the level of inflation, the current value of the shopping basket is determined and shown as the so-called consumer price index (CPI). This is compared with the value of the corresponding period of the previous year, the so-called base year. The difference is then the respective price increase, i.e. inflation. The individual product areas are weighted differently and are listed and shown by Destatis in the so-called currency scheme. The largest positions are in the areas of housing, food, energy and mobility. A similar approach also exists at EU level: here the ECB's Harmonized Index of Consumer Prices (HICP) reflects the average purchasing power of the Eurozone community.
Where is inflation particularly noticeable?
How much inflation affects your life also depends on your individual lifestyle. The high inflation is particularly felt by consumers with low incomes, as they spend a large part of their income on basic needs such as food, energy and rent. This means there is hardly any scope for saving.
Foods such as meat, oil and eggs in particular have become significantly more expensive since summer 2021. On average, they show a significantly higher price increase than the actual overall inflation rate: While this was 6.4 percent in June 2023, food prices rose by an average of 13.7 percent compared to the corresponding month of the previous year. In May it was almost 15 percent and in March over 22 percent. Experts suspect that some companies deliberately did not lower prices in order to increase their profits. This is then referred to as a so-called deadweight effect.
Finding savings opportunities: changing behavior and perspective
Many consumers are already changing their consumption behavior, as the experts at consumer advice centers observe: Many people are buying cheaper food products and fewer organic ones. And clothing and short-lived, rather dispensable everyday items that consumers often spontaneously picked up in the non-food section of the supermarket are now increasingly left behind. Those who want to save also make further compromises when it comes to leisure events, restaurant visits, home accessories and entertainment media. People are also saving money in the mobility sector: instead of cars, many people use the Deutschland Ticket, bicycles or other (e) vehicles.
These are the most important steps consumers can take to get through inflation:
