Cold Progression and Hidden Inflation: The double trap for real income

The financial leeway of citizens in Germany has been undermined by two mechanisms for years: the so-called cold progression in the tax system and the hidden inflation, which is gradually diminishing the purchasing power. Both effects reinforce each other and lead to a double real income loss spiral, which in particular low and medium-sized employeesincome meets.

Cold Progression – Creeping tax increase despite wage increase

The cold progression describes the phenomenon that rising gross wages – even if they only compensate for the general price increase (inflation) – lead to a higher income tax rate. The progressive tax system ensures that employees potentially slip into a higher tax class with every salary increase. If the salary adjustments are only inflationcorrespond, the individual purchasing power should not actually change. In fact, the individual remains less net in their wallets, because the tax burden climbs and neutralizes the gain. After all, this is about several hundred euros a year due to this creeping tax increase alone, even if its salary increase is exclusively due to inflation. the stateBenefits from rising tax revenues without the real income of citizens growing. Even if the legislature regularly reacts with adjustments such as an increase in the basic allowance, this often only compensates for the negative effects and thus prevents the tax burden from continuing to rise. There can be no question of an actual relief. The result is aloneBy the tax progression billions of euros additional burdens on the population.

Hidden Inflation – Loss of Purchasing at All Levels

Parallel to the cold progression, hidden inflation reduces the real purchasing power of households. Hidden inflation is understood to mean price increases that do not necessarily appear in the official consumer price index or are only recorded with a delay. These include, for example, price increases for energy, rent or services that occur above averageOr hide in special positions. Cost blocks such as electricity, heating energy, mobility or food often rise far faster than the general shopping cart for the official inflation rate suggests. For citizens, this means that even if the wage increase in the collective bargaining agreement should correspond to official inflation, there is less at the end of the month. Because the expenses forCertain areas of life are growing more than the balancing price increase rate. The summed up effects of various hidden price increases result in a creeping erosion of disposable income, which is often underestimated by politicians but is concretely noticeable in everyday life. Anyone who experiences additionally cold progression on this price point of pressure suffers from a double burden,which is not transparent and rarely deliberately balanced.

Interaction and cumulative consequences

The combination of both effects makes the problem particularly serious: the wage increase, which is intended to ensure inflation compensation, is thwarted by higher taxes (cold progression) and hidden price increases. Citizens have been seeing a forceps movement for years: on the one hand, the tax burden automatically increases because of the progressive tariff without thereal performance increases; On the other hand, this performance decreases because the actual cost of living in many areas is well above the official average. These double real income losses add up to a real effect that substantially threatens the standard of living of low and normal earners. Many households have to back downRefrain from social participation, consumption and private provision, since the actual disposable income shrinks year after year.

Distribution effects and political inactivity

In particular, the lack of a systematic, automatic balancing of progression and a realistic inflation indexing of social benefits exacerbates the problem. Adjustments to the basic allowance, child allowance and other relief are often hesitant, politically motivated and too low to ensure real financial security. at the same timeBenefits of higher earners, as they can handle their spending more flexibly and optimize income structures, while the broad masses of the population are being pushed into financial limits. The hidden inflation in central areas of life also remains unrecognized and uncompensated. It meets people with a high proportion of basic expenses such as rent, energy orFood is particularly strong, while the respective relief effect through politics and tax law is systematically insufficient.

Social consequences

The double real income losses caused by cold progression and hidden inflation undermine confidence in the social justice of the political and economic system. They lead to creeping impoverishment, declining social mobility and growing resentment towards government action. Earnings does not protect against relative poverty, salary increases lose theirsMotivational character and social participation becomes less privileged. All in all, the cumulative effect of both effects reveals a fundamental imbalance: real incomes are getting under increasing pressure, politics manages symptoms instead of tackling the causes, and the promised prosperity remains unattainable for broad sections of the population.