Inflation in Germany: Energy Prices, Profit Shares, and Market Power in Different Sectors

Countries all over the world experienced exceptional inflation rates since 2021 as a consequence of global supply chain disruptions, a post-Covid-19 demand shock, and rising energy costs after the Russian Federation’s invasion in Ukraine. Germany is one particularly relevant example, given that the European Union’s strongest economy has high anti-inflation sentiments and employs relatively tight fiscal policy but nevertheless suffered the longest from those shocks. This study examines price developments – broken down by various sectors – in Germany and how the additional revenues from these price increases were distributed between capital and labor. Results suggest that the high levels of inflation in 2021-2023 in Germany cannot be explained by the substantial rises in energy prices alone. The analysis of deflators for gross value added indicates that the price increases were heterogeneous across economic sectors with particularly high levels in agriculture, construction, energy supply, as well as services in trade, transport, and hospitality. Profits accounted for 57.6% of nominal gross value added in the most inflation-intensive sectors. This is 32% above the average of the other sectors, indicating that most of the inflation was associated with company profits in the high inflation sectors. The inflation consequently benefited capital owners at the expense of workers who suffered from increased prices without receiving sufficient compensation through higher wages. In terms of policy implications, there is no evidence of a wage-price spiral, but clear evidence that the key contributors of inflation were increased energy prices and corporate profits.