Germany's Expiring Fuel Subsidy Threatens to Push Inflation Past 3% as Households Brace for €400 Hit

Bundesbank warns inflation will exceed 3% as temporary fuel tax cut ends. Energy shock costs €34bn, GDP growth revised to 0.6-0.8%.

As Germany’s temporary fuel tax cut—a discount of roughly 17 cents per litre—runs out at the end of June, the country’s inflation rate is set to climb back above the 3-percent mark, according to the Bundesbank’s June monthly report. The measure, which lowered the energy tax on petrol and diesel, had helped keep consumer prices in check, but its expiry coincides with a broader surge in energy costs that is already eating into household budgets.

The Ifo Institute calculates that the current energy price shock is costing German consumers €34 billion in total, or about €400 per person. Families have been particularly squeezed: the IMK’s inflation monitor showed that the rate for low-income couple families dropped from 2.9 percent in April to 2.4 percent in May, a brief reprieve that is now ending. Meanwhile, food price increases slowed to just 0.4 percent—the smallest rise in two years—offering little comfort as fuel and heating bills accelerate.

Both the Ifo and the IMK (Institute for Macroeconomics and Business Cycle Research) sharply revised their growth forecasts downward on Thursday, citing the energy price shock as the main culprit. The Ifo now expects German GDP to expand by 0.8 percent in 2026 and again by 0.8 percent in 2027. The IMK is more cautious, predicting 0.6 percent growth next year and 0.9 percent the year after. A fiscal package from the federal government is propping up the economy by roughly 0.5 percentage points, but without it the outlook would be significantly worse. The state deficit is projected to reach 4.1 percent of GDP in 2026 and 4.9 percent in 2027.

Inflation forecasts also diverge slightly. The Ifo sees the rate at 2.9 percent in 2026, easing to 2.7 percent in 2027. The IMK expects 2.8 percent this year and 2.3 percent next year. Both institutes trimmed their earlier predictions made in the spring.

Ifo chief economist Timo Wollmershäuser described the economy as temporarily stagnating but not plunging into a deep recession—provided the Iran conflict does not escalate further. IMK director Sebastian Dullien called the economic damage “substantial” but manageable under the same condition.

Additional pressure comes from producer prices, which the Federal Statistical Office reported on Friday rose 2.2 percent year-on-year in May—the strongest increase since May 2023. Mineral oil products surged 34.9 percent, metals climbed 11.1 percent, and basic chemicals jumped 10.4 percent. There were bright spots: food producer prices fell 3.6 percent, with butter down 40 percent and pork 16.7 percent cheaper.

Across the eurozone, inflation remains stubbornly high. Eurostat confirmed a May rate of 3.2 percent, well above the European Central Bank’s 2-percent target. The Bundesbank expects only a modest recovery in the third quarter, with growth of just 0.1 percent, and sees a meaningful upturn arriving no earlier than autumn.