Germany: Are falling butter prices a sign inflation is over?

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 country's better-off couldn't help but cringe at 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.

For a few weeks now, however, German food prices have been falling again and butter from Ireland has dropped back down to €4.29 — almost what it cost before the pandemic. Homegrown German butter is considerably cheaper, with discount supermarket own brands priced at €1.59 for 250 grams.

Patience and confidence required

The German Institute for Economic Research (DIW) has also registered 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 people should not expect prices to fall everywhere, she added: "All it means is 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."

'Prices more likely to rise'

Kai Hudetz, managing director of the Institute for Retail Research in Cologne (IFH), sounded less euphoric. He cited the reasons for the price increases, which remain relevant.

"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 an "end to inflation", after all, prices are still rising in more product categories than they are falling. "Some manufacturers have announced price increases, which retailers will have pass on in view of their low margins. Comparatively high wage settlements are also flowing into prices, encouraging the tendency to rise."

Discount power

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 enables them to keep supplier prices down.

In the era of inflation, discount retailers such as Lidl have been able to boost their market share, as rising living costs have led more customers to shun the higher-priced offerings of conventional grocery chains. But with prices rising everywhere in Germany, even tough 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 being waged against suppliers such as Procter & Gamble, PepsiCo, Unilever and others could even lead to some product ranges being removed from supermarket shelves.

No quick turnaround

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

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

IFH Managing Director Kai Hudetz confirmed that 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."

The golden days are over

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.

Inflation is here to stay, says Kai Hudetz. He is 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."

This article was originally published in German.