In August, inflation in the euro area stood at 3%, significantly exceeding the 2% mark that the Governing Council of the European Central Bank (ECB) has defined as its new mediumterm inflation target (Slide 2). In Germany, the inflation rate, as measured by the Harmonised Index of Consumer Prices (HICP), hit 3.4% in August – a level not seen in 13 years.
And it is likely to continue growing until the end of the year. People are understandably worried about these developments. Higher inflation lowers the purchasing power and reduces wages and interest income in real terms – that is adjusted for inflation. Real interest rates on savings deposits in Germany are now visibly negative after the recent increase in inflation (Slide 3).