Germany Faces 4.6% Inflation Spike by End of 2024

Germany's Inflation Surge to 4.6% by December Sparks Economic Alarm

Germany Faces Sharp Rise in Inflation by Year's End, Warns Employer-Friendly Think Tank

The Cologne-based Institute of the German Economy (IW Köln), a research body closely aligned with employers, has warned that Germany could see a significant surge in inflation by the end of the year. In an analysis reported by newspapers of the Funke Media Group (Wednesday editions), the IW projects the inflation rate will climb to 4.6 percent by December 2024. For the full year 2026, the average inflation rate is forecast at 3.5 percent, up from 2.7 percent in March—the most recent figure available. The IW's report speaks of "looming inflationary pressure."

The primary driver behind the expected spike, according to the institute, is the escalating conflict in the Persian Gulf following the U.S. strike on Iran, which has sent oil and gas prices soaring—mirroring the sharp increases seen after Russia's invasion of Ukraine over four years ago. In 2022, inflation had peaked at over 10 percent, with the annual average settling at 6.9 percent.

The IW's inflation projection through the end of the year is based on price cycles observed during the 2022 energy crisis, triggered by Russia's war in Ukraine. At the time, the German government had introduced measures—such as a fuel discount—to curb rising costs. However, the IW notes key differences between the current situation and 2022, particularly the fact that the earlier price surge had been preceded by inflationary pressures from the COVID-19 pandemic.

As in 2022, the IW considers intervention by the European Central Bank (ECB) a possibility. Back then, the ECB had reversed its monetary policy, raising interest rates in multiple steps to combat inflation.

Markus Demary, the IW's monetary policy expert, expressed concern over the outlook. Germany now faces a scenario where inflation coincides with weak economic growth, creating a "policy dilemma" for the ECB. The central bank must choose between raising key interest rates—which could suppress inflation but further stifle growth—or temporarily tolerating higher inflation to avoid jeopardizing a fragile economic recovery. Either way, Demary said, the ECB would have to "make monetary policy decisions in an environment of high uncertainty."

In response to the U.S.-Israel conflict with Iran, the German government has already rolled out several relief measures. Starting May 1, a temporary fuel discount will take effect, cutting taxes on diesel and gasoline by around 17 cents per liter for two months. Additionally, companies will be allowed to pay employees a tax-free relief bonus of up to €1,000.

However, Demary argues that these steps may not go far enough, particularly for low-income households now under financial strain. "The government should focus on easing the burden for these households—for example, by increasing the commuter tax allowance to offset higher travel costs," he said. Economics Minister Katherina Reiche (CDU) had previously floated the idea of a broader increase in the commuter allowance for all drivers but faced criticism from within her own party.