The Institute of German Economy (IW Köln), an employer-aligned think tank, predicts a significant rise in inflation across Germany by the end of the year. According to an analysis detailed in the “Funke”-group newspapers, the IW forecasts that inflation could climb to 4.6 percent by December of this year. If this trajectory continues, the average inflation rate for the entire year of 2026 would stand at 3.5 percent. This follows a recent jump to 2.7 percent of inflation in March, suggesting the institute anticipates escalating inflationary pressure.
A primary driver for this anticipated increase is the ongoing instability in the Persian Gulf, sparked by the US attack on Iran. The institute notes that this geopolitical conflict has caused oil and gas prices to rise sharply, mirroring the spike seen after Russia’s invasion of Ukraine several years ago. In 2022, the inflation rate peaked above ten percent, averaging 6.9 percent throughout the year.
The IW modeled its year-end inflation scenario using historical price cycles from the energy crisis that followed the Russian war. While the German government previously introduced measures, such as filling discounts at gas stations, to curb price increases, the IW points out significant differences between the current situation and 2022, which was preceded by elevated inflation caused by the COVID-19 crisis.
Experts at the IW noted that the European Central Bank (ECB) would likely need to intervene, much like in 2022. At that time, the ECB reversed its monetary policy, raising interest rates incrementally to combat inflation.
Markus Demary, an economic policy expert at the IW, expressed concern regarding a recurrence of a situation where high inflation coincides with weak economic growth-a conflict of goals for the central bank. Demary explained that the ECB could either raise key interest rates to manage inflation, thereby also dampening already weak economic growth, or it could temporarily tolerate higher inflation to avoid jeopardizing any slight economic recovery. In either case, he cautioned that the ECB would be forced to make demanding monetary policy decisions amid significant uncertainty.
In response to the recent escalation in tensions between the US and Iran, the German government has already implemented several measures. These include a temporary discount on gasoline and diesel, which is slated to begin on May 1st, reducing the taxes by about 17 cents per liter for two months. Furthermore, companies may be able to pay their employees a tax-free relief bonus of 1,000 euros.
Despite these efforts, Demary does not view these measures as entirely sufficient. He argued that low-income households are currently under significant strain. Demary recommended that the government focus on alleviating the burden on these specific households, suggesting that covering the higher costs of commuting through an increased commuter allowance would be a vital measure.
Historically, the Minister of Economics, Katherina Reiche (CDU), had proposed a general increase in the commuter allowance for all drivers, though this proposal faced criticism even within her own party.