The Institute of the German Economy in Cologne (IW Köln) anticipates a significant rise in inflation across Germany by the end of the year. According to an analysis reported by the Funke media group, the IW projects that the inflation rate could reach 4.6 percent by December of this year. If this projection holds, the average inflation rate for the entire year of 2026 would be 3.5 percent. This follows a recent jump where inflation rose to 2.7 percent in March, leading the IW to warn of increasing inflationary pressure.
The primary driver for this predicted increase is identified as the ongoing conflict in the Persian Gulf, particularly following the United States’ attack on Iran. The experts note that the resulting surge in oil and gas prices mirrors those seen four years ago after Russia’s invasion of Ukraine. During 2022, the inflation rate peaked at over ten percent, averaging 6.9 percent for the year.
The IW’s simulation, which models inflation up to year-end, bases its calculations on price cycles established during the last energy crisis following the Russian invasion. The German government implemented various measures at that time, such as a fuel discount, to curb rising prices. However, the IW stresses that the current situation differs notably from 2022, as the previous crisis was preceded by inflation triggered by the COVID-19 pandemic.
Like its assessment in 2022, the IW suggests that measures taken by the European Central Bank (ECB) remain conceivable. Historically, the central bank has reversed its monetary policy, raising interest rates in several steps to counteract inflation.
Money policy expert Markus Demary, affiliated with the IW, expressed deep concern, pointing out that the economy again faces a scenario where high inflation coincides with weak economic growth-a goal conflict from the ECB’s perspective. He outlined two difficult choices for the central bank: either raise key interest rates to fight inflation and consequently stifle the already weak growth, or allow temporarily higher inflation to prevent threatening any slight economic recovery. Demary concluded that in any case, the ECB must make “monetary policy decisions in an environment of high uncertainty”.
Meanwhile, the German government has already announced several measures in reaction to the US-Israel-Iran conflict. Among these is a temporary fuel discount starting May 1st, which will reduce the taxes on diesel and gasoline by approximately 17 cents per liter for two months. Additionally, businesses might be able to provide employees with a tax-free relief bonus of 1,000 euros.
Despite these efforts, IW expert Demary questioned the comprehensiveness of the measures, noting that low-income households are particularly vulnerable. He advised the government to focus on alleviating the burden on these groups, suggesting ways like increasing the commuter allowance to offset the higher costs associated with traveling to work. While Economics Minister Katherina Reiche (CDU) had considered a general increase in the commuter allowance for all drivers, that proposal had also faced criticism even from within the ruling coalition.
