The end of German prosperity?

Stroll through Berlin's most Instagrammable neighborhoods and you might not know that inflation is rising, costs are soaring, and the largest war in Europe since World War Two is unfolding just two borders over. Bars and restaurants are packed, and lines for clubs are long, as locals and tourists alike make the most of the summer months.

Real prices for leisure activities and goods are up, but orders of avocado toast and artisanal bread do not seem to be down. That is partly due to income, with the higher earners who tend to consume these kinds of commodities able — or willing — to absorb the few euros more that many businesses have tacked onto sales this year.

"The price of everything has gone up," Stephanie Lynch, a barista at Blaue Bohne, a coffee roaster in Berlin's popular Friedrichshain neighborhood, told DW. "Literally everything we use here, the price has gone up: the paper cups, the cardboard, the bags we use to put the coffee into. Everything."

After years of holding prices steady, Lynch said the cafe did one round of price hikes to reflect earlier interruptions to supply chains, such as pandemic restrictions, a bad coffee crop in Brazil, and last year's days-long blockage of the Suez Canal.

Another increase may be necessary soon, she added, as a result of a worrying wave of economic data, though many customers seem ready to shell out more dough for the same beans.

Inflation bites consumers

Inflation is running at nearly 8%, compared to the same time last year, according to Germany's Federal Statistics Office. Consumer energy and food prices are up more than 38% and 11%, respectively.

That may still be manageable for drinkers of small-batch roasted espresso, but the lower you go on the income ladder, the harder it is to keep up.

"Of course, the consequences of the current crisis are directly felt," Markus Grabka, a senior researcher at the German Institute for Economic Research, told DW. "Low-income households are, for example, harder hit by rising energy costs than those with middle or higher incomes."

The food staples — cooking oil, flour, meat, milk, and eggs — are all up by high double digits. In all, food costs may be €250 ($263) more per person this year, according to a study by Allianz Trade, an insurer.

The added burden is heavier on those who already struggle to make ends meet. More than 560,000 retirees in Germany need a government top-up because their pensions are too low to get them over the poverty line. Rising food and energy costs take an even bigger bite out of their already smaller pie.

Homeowners and mortgages

Only 42% of people in Germany own their homes. Inflation has further dashed hopes of homeownership, as central banks rush to raise interest rates in an effort to rein in prices.

A housing crisis was already gripping many parts of Germany, but those who did manage to find something to buy were often rewarded with ultra-low interest rates. An era of nearly free debt, which pushed mortgages to 1% or lower, appears to be over.

In just the last few months, interest on home loans has jumped to over 3% — the highest in a decade — according to the mortgage advisor, Interhyp, and a further rise is expected. That adds tens or even hundreds of thousands of euros to a buyer's costs over the course of paying back the bank.

A perfect storm

The historic, cross-the-board price spiral is the culmination of a cascade of events that upended assumptions about the free flow of trade around the world.

The COVID-19 pandemic caused a mismatch between supply and demand. In an unprecedented intervention, governments and central banks rallied to protect people from the economic shock of nationwide shutdowns.

The lack of parts has not only been a problem for global giants producing cars and high-end smart devices but for local and small business owners, too. Bike shops in Berlin, for example, have turned away customers due to out-of-stock essentials. Repairs that typically take a day or so can stretch for weeks as they wait on orders to arrive.

Global supply chains were still catching up when the world's biggest wheat exporter, Russia, invaded the world's fifth-biggest, Ukraine. That has left grocery store shelves empty of flour and oil, which Ukraine also exports on a large scale. Meanwhile, disruptions to gas and crude supplies have shattered energy markets, which in turn add costs to everything that fuel goes into — from production to transport.

Germany has just triggered the second of its three-phase emergency gas plan — a historic first, which could lead to restricted industrial output and yet higher prices.

Energy price hikes: No end in sight

While economists debate how high prices will go and for how long — some are optimistic that certain ones are beginning to level off — the risk remains of a delayed impact on costs, as increases work their way through supply chains. They affect producers and wholesalers first, before passing on to retailers and consumers.

That means people may still feel the pinch even after exacerbating factors ease up.

"My concern is that we could have a very worrying situation in a few weeks or months," Germany Finance Minister Christian Lindner told the public broadcaster, ZDF. "We're looking at three-to-four, maybe five, years of shortages that we need to find an answer for."

Edited by: Rina Goldenberg

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