Inflation Bites: Action vs. Acceptance

Image: Consumer prices in Germany broken out by sector, from Destatis

When I woke up this morning, it really hit me for the first time: we aren't in total control of our expenses. I kind of freaked.

Electricity

In the past month, we've been hit with two disturbing price increases. First, we were hit with a price increase for our electricity. It's gone from 31.345 cents/kWh to 39.827 cents/kWh, which is a 27% jump. It would be even worse if we changed contracts, since existing customers get slightly better deals than new customers, so there's nowhere to run.

Right now, we're trying to get our electricity use under control; shorter more precise showers, bulk food prep, and turning electronics off and unplugging them are some of the steps we're taking. So far, it's only made a slight difference.

I've considered buying more efficient electronics (a new stove or refrigerator), but would these new objects actually pay for themselves fast enough to be worth it? I doubt it.

Rent

Even worse, our rent was raised by 17%. Back when we signed our lease, we agreed to have our rent tied to the Verbraucherpreisindex (the German consumer price index). The landlord explained this to us, and I even remember him telling us, but I didn't totally understand what it meant because, well, not understanding everything you're hearing is just part of the immigrant experience¹.

However, I didn't really understand what I was signing. I feel both like an idiot and like I'm sitting on a time bomb. If inflation continues rising in Germany, we could not only be priced out of our existing apartment, but we could be priced out of our neighborhood entirely, forcing us to downsize our living space and move much further from my employer.

German housing sucks right now. I looked around the city to see what prices are like for buying apartments and houses, and it's all bad news. From an American perspective, houses are laughably small and are often comparable to apartments in terms of actual living space. However, they are still expensive and often situated away from good public transport.

Apartments are probably a better option, but they come with mandatory building expenses and neighbors. To be fair, both apartments and houses are often joined to a neighbor's structure, and although I'd like to have some real privacy, privacy is out of our budget.

Let's not forget that mortgages have also gotten more expensive, so previously affordable mortgages are now priced out. Naturally, my German savings account still pays me nothing.

Running the Numbers

As I mentioned in a previous article, you take a huge loss up front when you buy property here. If we saved up €50,000 for a down payment on a place, it's likely that most of that would just go to the Grundsteuer, the Makler, the registration costs and so on. It's a pure loss up front, and it's the kind of thing that leads to sunk cost fallacies: no matter how much I'd want to make a life change, I'd always have this huge expense in the back of my mind.

So I'm trying to look at the numbers rationally and chill out. The rent increase is about 112 EUR. Divide €50,000 by €112, and that's 446 months or 36.16 years. So does it make sense to spend €50,000 to save myself from 36 years of this rent increase?

No, damn it, it doesn't make sense².

Remodeling as Further Disincentive

Another number to consider: if we moved, we'd likely have to remodel in some fashion. German houses and apartments often come without floors, for example, or toilets or kitchens. All of that costs money. So let's say we moved and remodeled, and it cost us €20,000 on top of the €50k we already spent on taxes and fees. That another 178.57 months of this rent increase or just under 15 years.

The risk, of course, is that this isn't the only rent increase. The German CPI jumped by 17% year over year in May, so let's extrapolate into the future. If rent increased again by 17% from our new level, that would be a €129.61 increase. Combined with the previous raise that's a €242 additional payment. So €70,000/242 = 289 months or 24 years. So would it make sense to save and then spend €70,000 up front in order to spare myself 24 years of a worst case scenario rent increase?

I don't think so. But now I'm less certain. And if it happened for a third and fourth year in a row, the numbers start to get worrying very fast. I have to remind myself however, that even if we owned a place, a world in which prices are rising by 17% every year is a world where we're still on the hook to buy things that are increasing 17% every year. If a water heater breaks or if the roof needs repairs or whatever, that would be on us.

I don't have a good answer, and I think I'll have to live with that. My hope is that our incomes will also rise to meet this new challenge, but I can't guarantee it.

Accepting a Loss of Control

Image: various price changes from Destatis

I'm not happy with it, but I have to live with being out of control to some extent. Otherwise I'll drive myself crazy. We do have control over some things, such as our groceries, which have also gone up in price. In that realm, we still have some maneuverability, so we'll have to do what we can there to feel like we have some power.

Hopefully, this doesn't go on forever. And hopefully, I won't be writing a similar article a year from now, chastising myself for not seeing the signs of impending doom via inflation and taking decision action. I'm not sure what action is best besides trying to earn more and spend less.

I'm sure you're feeling some pain from inflation. This is a difficult period for everyone. Just make sure you look at the numbers before taking some kind of drastic action to save yourself from it. It might not be worth it.

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1. This is a relatively new method for German landlords to extract higher rents since the default method is for rent increases to be determined by the city. ↩︎

2. I would like to own property one day, but the upfront costs continue to dissuade me from going too far down this path. ↩︎