regular-article-logo Wednesday, 31 May 2023

Germany: Are falling butter prices a sign inflation is over? No quick turnaround, says experts

Germans spend less of their income on food than most Europeans. Even the market distortions caused by Russia's invasion of Ukraine haven't been able to fundamentally change this

Deutsche Welle Published 26.05.23, 05:09 PM
Representational image

Representational image Deutsche Welle

German consumers are looking less concerned when shopping for groceries these days, as prices for food have begun falling slowly. But is peak inflation behind them?

Germans spend less of their income on food than most Europeans. Even the market distortions caused by Russia's invasion of Ukraine haven't been able to fundamentally change this.


Poorer Germans, who spend a sizable chunk of their available income on food, have always had to pinch and scrape at the supermarket checkout. But in recent months, even the better-off in the country couldn't help but cringe over the price of a 400-gram tub of their cherished Irish butter, which jumped to €4.99 ($5.38) at the height of inflation earlier this year.

But for a few weeks now, German food prices are falling again and the butter from Ireland has come down to €4.29 — almost what it cost before the pandemic. Homegrown German butter is even cheaper, with the discounters' own brands costing €1.59 for 250 grams.

The German Institute for Economic Research (DIW) is also seeing a turnaround in inflation in Germany: "We have probably reached the peak of inflation. The trend reversal has begun," researcher Kerstin Bernoth told the joint corporate newsroom of Germany's Madsack Media Group recently.

But one should not expect prices to fall everywhere now, she added: "It only means that prices will not continue to rise. We have to get used to the current prices." What's needed now is patience, Bernoth said, urging consumers to "trust that prices will settle back lower in the long run."

Kai Hudetz, managing director of the Institute for Retail Research in Cologne (IFH), sounds less euphoric. He cites the reasons for the price increases, which are still relevant.

"The skyrocketing energy, logistics and raw material costs have triggered a chain reaction," he told DW. "All companies along the value chain have had and continue to have to contend with rising costs."

Hudetz noted, however, that many additional costs have already been passed on to consumers, which is why "inflation rates are currently lower and at least selective price reductions are possible."

The IFH director is far from declaring "the end to inflation" because prices are still rising in more product categories than they are falling. "Some manufacturers have announced price increases, which retailers must pass on in view of low margins. The comparatively high wage settlements are also flowing into prices that continue to tend to rise."

One reason for comparatively low food prices in Germany is fierce competition between some of the biggest retailers in Europe. Brands such as Rewe, Edeka, Aldi and Lidl fight for market share and their purchasing power allows them to hold down prices from suppliers.

In the era of inflation, discount retailers such as Lidl have been able to boost their market share, as rising costs of living led more customers to shun the higher-priced offerings of conventional grocery chains. But with prices rising everywhere in Germany, even tough-nosed negotiators like Lidl Germany CEO Christian Härtnagel are finding it difficult to drive a hard bargain.

"We know the development in the raw material markets. We know approximately how much personnel and energy costs go into the individual products. And we do everything we can to achieve negotiating success so that we can pass on the best possible price to customers," he told German news agency dpa recently.

Nevertheless, he said, current price wars waged against suppliers such as Procter & Gamble, PepsiCo, Unilever and others, could even lead to a range of products being removed from supermarket shelves.

According to Härtnagel, the German discounter would be negotiating "intensively" to keep price hikes "within limits" and defend its customers against "unreasonable" demands.

Lidl wants to "react quickly" when food markets ease, said Härtnagel, referring to past reductions for butter, pasta or cheese. But he dampened hopes for a rapid and comprehensive price turnaround.

But IFH Managing Director Kai Hudetz said currently prices "are only falling in isolated cases, and that too only slightly." What German consumers are seeing are "mainly promotional prices" and reductions in vegetables and fruit "due to seasonal factors."

Market analysts believe a return to pre-pandemic food price levels will be a long time coming, if at all. The market power of Germany's Big Four discount retailers might ensure that purchase prices rise less significantly than in other European countries, but even these low-cost champions cannot avoid higher prices, both within their own companies and on the part of their suppliers.

So, inflation is here to stay, says Kai Hudetz, and he's convinced that prices won't fall back to pre-pandemic levels. "We will have to get used to higher food prices, at least in the short and medium term."

Follow us on: