Since the Russian war of aggression in Ukraine, life in Germany has become enormously expensive, fueled by high energy and food prices. The Federal Statistical Office announced how inflation developed in February in a first estimate on Wednesday afternoon. Last year, consumer price increases averaged 6.9 percent. Initially, the statisticians had calculated 7.9 percent – the highest rate in the history of the Federal Republic. What are the reasons for the change and what are the consequences?

How is the inflation rate calculated?

Month after month, employees of the State Statistical Offices and the Federal Office in Wiesbaden note the cost of fruit and vegetables, books and magazines, shoes and furniture in shops across Germany. How much is the apartment rent, what does the gas cost at the gas station? Thousands of individual prices for goods and services are recorded according to a consistently consistent scheme. Some of the prices are also collected on the Internet.

What is the function of the so-called shopping cart?

The individual prices are summarized in around 700 types of goods, which form the so-called shopping basket. On this basis, the statisticians calculate the development of inflation. Since consumers do not spend the same amount on clothing, for example, as they do on renting an apartment, the individual items are weighted differently. The item housing, which primarily includes rents, expenditure on owner-occupied housing and household energy, is by far the most important.

Why is the shopping cart regularly scrutinized?

The Federal Statistical Office generally reviews the weighting and composition of the basket of goods every five years. Because people’s consumption and shopping habits are changing. Increasing digitization and demographic change are also reflected in this. “For example, the price development of smartwatches, fitness trackers and similar products, but also of walking aids and everyday aids, is now published,” explains the authority.

Why is inflation lower than calculated in 2022?

To put it simply, this is mainly due to the changed weighting. Although the area of ​​housing still has the greatest weight, it has been reduced. Other areas were given more weight. “Whereas household energy and fuel used to account for more than 10 percent, this is now just under 7 1/2 percent,” explains Commerzbank economist Ralph Solveen. “Although the weight of food has increased by two percentage points at the same time, their prices have not risen as massively as energy prices.”

On what basis was the weight changed?

In addition to the results of official household surveys, the authority also used results from national accounts, which contain other data sources, for the first time in the current revision. This would take advantage of different sources, the authority argued.

What are the consequences of rising consumer prices?

If prices rise sharply across the board over a longer period of time, people can afford less and less for their money and lose some of their savings. Some prices are directly linked to inflation, such as index rents. The consequences of the newly calculated inflation rate in this case will probably depend on the individual case. According to the Homeowners Association

Does the inflation rate affect collective bargaining?

“We don’t see any need for adjustment in the short term,” says a spokesman for the Verdi union. Forecasts would also be taken into account in the tariff demands. These predicted significantly high inflation over the term of a collective agreement. “In the negotiations in the public sector, we also focus on lower and middle-income groups, who are particularly affected by high inflation.” According to studies, necessary expenses, such as food, rent and energy, tend to make up a larger proportion of the budget of lower-income households than those of wealthier private households. Verdi and the DBB civil servants’ association are currently calling for an increase in income of 10.5 percent for federal and municipal employees, but at least 500 euros per month for a period of twelve months.

What does the change mean for the interest rate policy of the ECB?

When making interest rate decisions, the European Central Bank (ECB) keeps inflation in mind throughout the euro area. Inflation there has been well above the ECB’s medium-term target of two percent for months. In January, consumer prices in the common currency area rose by 8.6 percent compared to the same month last year. ECB President Christine Lagarde recently reiterated the need for interest rates to rise further. Higher interest rates make loans more expensive. This can slow down demand and counteract high inflation rates.