Europe’s monetary authorities, whose primary goal is a stable euro, appease: Much of what has recently been driving inflation up are temporary effects. Rising energy prices and supply bottlenecks as a result of the economic recovery after the Corona crisis in 2020. “Inflation is currently unexpectedly high, but we believe that it will decline in the next year,” said the chief economist of the European Central Bank (ECB), Philip R. Lane.
So far, the ECB has not seen a major risk that rising wages could lead to a sustained rise in inflation – in other words, a dangerous wage-price spiral would result. “Overall, we continue to assume that inflation will remain below our new symmetrical two percent target in the medium term,” said ECB President Christine Lagarde recently.
Not everyone shares this optimism. But are inflationary risks actually “systematically underestimated in Germany”, as FDP leader Christian Lindner said in an interview with the “Frankfurter Allgemeine Zeitung” at the beginning of November? “I’m not a cashier, but I recommend paying close attention to currency devaluation. In Europe, some euro countries are already heavily dependent on the ECB buying large amounts of their bonds, which makes it difficult to change course,” said Linder.
Critics have long warned of the consequences of the glut of ECB money for price stability. But in the past few years it has not been apparent that all the cheap money is fueling inflation. On the contrary: Despite the zero interest rate policy and billions in securities purchases, the ECB has for years failed to achieve its goal of anchoring the annual rate of inflation at a value sufficiently far from zero. Meanwhile, the monetary authorities are aiming for two percent inflation in the medium term.
The former ECB chief economist Otmar Issing summed up in an interview with the German press agency at the beginning of November that inflation had “virtually disappeared from the radar screen of observers”. This is one of the reasons why the sudden rise in consumer prices – both in Germany and in the euro area – has recently been so frightening for many people.
“The ECB rightly points out that temporary factors play a role here,” said Issing. For example, the VAT effect in Germany will no longer apply at the beginning of 2022: In the 2020 Corona crisis, the federal government lowered the VAT rates for half a year in order to stimulate consumption. Since the beginning of 2021, the regular rates have been in effect again, the more expensive goods and services in a year-on-year comparison and driving up inflation. Many supply chain bottlenecks have recently led to price increases, explained Issing.
In his estimation, however, energy will tend to become more expensive, said Issing, “if only because the price of CO2 has to rise”. Much of what has to do with climate change will make production more expensive. “In other words, I do not assume that inflation will remain as low in the long term as we were used to for many years,” said Issing’s conclusion. “At the beginning of next year, however, a significant temporary decline can be expected.”
Relaxation on the subject of inflation in 2022 – that is the consensus among economists. In its most recent report, the Advisory Council for the Assessment of Macroeconomic Development predicts a decline in the inflation rate in Germany to 2.6 percent for 2022. However, the “economic wise men” also advise not to underestimate the risk of inflation: Long-term delivery bottlenecks, higher wage agreements and rising energy prices harbor the risk, according to their assessment, that “actually temporary price drivers” could lead to sustained higher inflation rates.
The considerable rise in energy prices in particular harbors social explosives, as politicians have recognized. The list of suggested countermeasures is long. The coalition agreement between the SPD, the Greens and the FDP provides for the abolition of the EEG surcharge to promote green electricity at the beginning of 2023, which electricity customers pay on their bills. CSU boss Markus Söder brought a reduction in VAT on gasoline into play. France proposed a reform of the EU electricity market and consumer advocates called for an increase in the housing benefit “so that nobody has to freeze this winter”.
A small consolation for Germany’s consumers: the rise in consumer prices is not a German or European phenomenon. In the USA, for example, inflation was most recently over six percent. US President Joe Biden promised that it was his top priority to reverse this trend.
— By Jörn Bender and Friederike Marx, dpa —
Image sources: Pincasso / Shutterstock.com, MichaelJayBerlin / Shutterstock.com