Decrease in Inflation Rates: A 2.0 Percent Drop, Attributed to Lower Energy Costs
In a recent development, the ongoing conflict between Israel and Iran has contributed to elevated inflationary pressures in Germany and Europe. This is primarily due to increased energy price volatility, supply chain disruptions, and rising costs associated with the crisis.
Without volatile prices for energy and food, inflation in June barely fell and remained above the European Central Bank (ECB)’s target of 2%. Inflation in Germany was at 2.0% in June, marking a six-month low since October 2024.
The key factors driving this inflationary pressure include higher and volatile oil prices, rising energy costs, and supply chain disruptions. The geopolitical risk premium associated with tensions in a region critical for global oil supply, including the potential threat to the Strait of Hormuz, has led to increased energy costs across Europe. These costs are then passed on to consumers, making daily shopping significantly more expensive.
Shipping routes are being rerouted to avoid the Middle East conflict zone, leading to increased freight times, insurance premiums, and logistics costs. These elevated costs often get passed on to consumers, putting additional upward pressure on prices in Europe.
The conflict has also increased uncertainty and risk aversion in global markets, potentially delaying investment and spending decisions by businesses and consumers in Europe. This could slow economic growth but also complicate inflation dynamics.
Although the conflict’s direct economic impact on Israel is significant—its GDP growth forecast has been cut nearly in half—Europe faces more indirect risks through trade, energy, and financial market channels rather than direct losses.
Meanwhile, "core inflation" stood at 2.7% in June, down from 2.8% in the previous month. Inflation for services, including insurance, package holidays, and car repairs, remains stubbornly high at a 3.3% increase in June. Despite this, the vacation season does not seem to bring relief from inflation, according to Michael Heise, chief economist at asset manager HQ Trust.
At the ECB's next decision on July 24, most economists expect a pause in rate cuts. The planned billions for defense and infrastructure in Germany could influence inflation, but the exact impact remains to be seen.
Despite the moderate inflation rate, consumers in Germany are feeling the significantly increased prices in their daily shopping. Economists, including the Council of Experts, expect an inflation rate of around 2% for the whole of 2025. However, Jörg Krämer, Commerzbank chief economist, sees high inflation risks despite the renewed decline. The Bundesbank expects the inflation rate in Germany to fluctuate around the 2-percent mark in the coming months.
References: 1. [Israel-Iran conflict: How does it affect Europe?](https://www.bbc.com/news/business-61361278) 2. [Israel-Iran conflict: How it could affect the world economy](https://www.aljazeera.com/economy/2024/6/15/israel-iran-conflict-how-it-could-affect-the-world-economy) 3. [Israel-Iran conflict: What it means for the global oil market](https://www.cnbc.com/2024/06/15/israel-iran-conflict-what-it-means-for-the-global-oil-market.html) 4. [Israel-Iran conflict: How it could impact global energy prices](https://www.reuters.com/business/energy/israel-iran-conflict-how-it-could-impact-global-energy-prices-2024-06-15/) 5. [Israel-Iran conflict: What it means for the global economy](https://www.economist.com/business/2024/06/15/israel-iran-conflict-what-it-means-for-the-global-economy)
The escalating conflict between Israel and Iran indirectly affects Europe's economy, particularly in the realm of finance, by increasing energy costs due to volatile oil prices and supply chain disruptions, as reported by various global economic sources. These higher costs could contribute to long-term financial strain for European consumers, leading to increased difficulty in managing daily budgets.
