I was keen to get my hands on more data on Germany and finally found out about the GENESIS online database of the Federal Statistical Office. It gives you access to a vast range of datasets, for example longitudinal data on the labour market, demographic trends or inflation. What I want to do today is to use the CPI and its sub-indices for the period 2005 to 2015 to analyse which goods and services have become much more expensive over the last decade. So what has really driven (and what has not driven) inflation in Germany? And what has contributed to the slowdown of inflation and deflationary pressures recently?
For this I obtained the CPI data from the GENESIS database. Originally it was indexed to 2010. However, to spot trends more easily, I changed the base year to 2005. So let’s look at the basket of the typical German consumer first. What is included?
- Food and non-alcoholic beverages
- Alcoholic beverages and tobacco
- Clothing and footwear
- Housing, water, electricity, gas and other fuels
- Furniture, lighting equipment, appliances etc.
- Recreation, entertainment and culture
- Accommodation and restaurant services
- Miscellaneous goods and services
The CPI consists of 12 categories of which some contain further sub-indices. For example food is separated into bread, meat, dairy, fruits etc. while transport contains the purchase of vehicles as well as maintenance and service costs or the cost of transport services (railway, road, air, waterway).
So let’s look at the data. The CPI rose by 15.6 percent over the period from 2005 to 2015. This means that inflation, on average, was at around 1.6 percent per annum which is close to the ECB’s desired target of just under 2 percent. However, this does not reveal the significant differences among the categories and the differences in price increases between certain years. While categories 4, 7 and 12 saw a similar total increase as the overall CPI over the period, others rose a lot more rapidly, as shown in the diagram above. Germany saw the most significant price increases in the areas of food, beverages and tobacco. On the other hand, prices actually fell in the area of communication, driven by much cheaper prices for telephones and other communication devices and cheaper telecommunication services. Prices in categories like healthcare or recreation, entertainment and culture rose to a lesser extent than the CPI in total. Overall, inflation came almost to a halt in the period from 2008 to 2010 (global financial crisis) and again recently since 2014.
Let’s take a closer look at the first category – food and non-alcoholic beverages. For example, there is a significant difference among animal source foods. Dairy and eggs saw a price spike in 2008 and 2014. Compared to 2005, the price for dairy and eggs was more than 25 percent higher in 2015. Meat prices rose by 22.6 percent over the decade but prices were much less volatile than dairy prices. The most significant price increase in animal source foods was recorded in fish and fish products of more than 36 percent over the decade.
The highest total price increase in the food category for the complete period was recorded in the price of fruit. Compared to 2005, fruit prices today are more than 40 percent higher. One can also see that prices fell during the global recession 2008/09 but thereafter picked up again. In comparison, vegetable prices actually saw higher price increases until 2010 with a similar drop during the global recession. After 2010, however, vegetable prices decreased in some periods and increased in others, so that the total price increase over the decade turned out to be only around 27.9 percent. Prices for edible fats and oils peaked in 2013 with a total price increase of almost 45 percent from 2005 to 2013. Since 2013 prices in this category have fallen by 6.72 percent.
Bread and cereal prices as well as prices for sugar, jam, honey etc. rose more than the overall CPI over the decade but with less price fluctuations than the other food categories. However, while inflation has almost come to a halt recently, prices in these two categories still increase. Bread and cereal prices rose by more than 5 percent from 2012 to 2015. Sugar, jam and honey prices rose by more than 7 percent. Over the same period the CPI only rose by 2.7 percent.
Regarding non-alcoholic beverages prices for coffee, tea and cocoa were relatively volatile from 2005 to 2015. They increased by 10.6 percent from 2010 to 2011, that is in only one year. Since 2013 the prices have picked up again. Both prices for coffee, tea and cocoa as well as mineral water, soft drinks and juices stagnated or actually fell during the period from 2008 to 2010 due to the global recession. Since 2014, however, mineral water, soft drinks and juices have become cheaper.
In the second category the main price driver is tobacco. Prices for alcoholic beverages rose in tandem with the CPI. In comparison, tobacco prices rose by more than 38 percent over the decade. This has been a steady increase, even during the recession.
Another important category is housing and in particular gas and electricity. Germany passed its green energy agenda in the last decade in order to turn to more sustainable sources of energy in the long run. Many have argued that this has contributed to the significant cost increases in electricity. Electricity prices increased steadily from 2005 to 2014 by more than 63 percent. From 2014 to 2015 they fell slightly. From 2012 to 2013 alone electricity prices rose by almost 12 percent. However, the price of liquid fuels at its peak in 2012 was actually even higher; compared to 2005 it was almost 66 percent higher. Liquid fuel (oil) prices were much more volatile than electricity prices over the last decade. During the recession liquid fuel prices fell to 2005 levels and since 2012 they have become significantly cheaper for German consumers. The tremendous fall in oil prices is also one of the reasons for low inflation recently and might push Germany into deflation if the fall continues. In comparison, gas and central heating rose a lot until 2009 but have recently receded to 2008/09 levels.
Transport includes air, waterway, road and railway but CPI data on the latter is only available from 2010. Hence it is not included in the diagram. One can easily see that, while all means of transport have become more expensive, waterway is by far the most expensive today. It increased by more than 63 percent from 2005 to 2015. Air travel prices rose significantly until 2012 and have more or less stagnated since then. The highest increase in air travel prices occurred over the period from 2010 to 2012 where prices went up by more than 20 percent. In comparison, road transport actually rose in tandem with the CPI at least until 2013. But over the year from 2014 to 2015 prices in this category increased by more than 12 percent, despite the stagnating CPI, making other alternatives like air travel more attractive.
As mentioned earlier, communication was the only category that actually saw a decline in prices. This is largely due to cheaper telephones (smartphones) and the advancement of technology. Over the last decade, telephone prices have fallen by more than 68 percent. Prices for telecommunication services fell by almost 19 percent. On the other hand, postal and courier services prices stagnated until 2012 but have picked up recently.
Price increases in the category newspapers, books and stationery differed in the last decade. While newspapers and periodicals have become more expensive, i.e. more than 45 percent more expensive than in 2005, the price for books has risen to a much lesser extent and actually declined slightly from 2014 to 2015. Book prices stagnated until 2008 and were back to 2005 levels in 2011. On the other hand, stationery and drawing materials rose in tandem with the CPI.
Lastly, I want to take a closer look at education. The CPI component ‘services of secondary education’ is only available from 2010 and therefore not included in the diagram. Still, the picture is an interesting one. By 2008 tertiary education prices had more than doubled. This was caused by the introduction of tertiary tuition fees. But in the years that followed these fees were abolished step by step and by 2015 none of the federal states charged tuition fees anymore. The spike in the price for tertiary education also drove the CPI Education index (in green) in total. It therefore hides the fall in the price of pre-primary and primary education from 2007 to 2012. By 2012 prices in this category had fallen by more than 10 percent. In 2015, they were back at 2005 levels.
I hope you enjoyed today’s exercise. It gives some insight into the major differences in inflation across different categories of the CPI basket. Thanks for reading!
*moderate to low inflation
Destatis (2016). Consumer price index: Germany, years, individual consumption
by purpose (COICOP 2-4-digit hierarchy) [Data file]. Retrieved from: https://www-genesis.destatis.de/genesis/online/data;jsessionid=B59BF66301C1C234D86C5CD4208C6CFF.tomcat_GO_1_1?operation=abruftabelleAbrufen&selectionname=61111-0003&levelindex=1&levelid=1462699226069&index=3