ECB President Christine Lagarde and her team defiantly stuck to their interpretation of the data.
(Photo: dpa)
Dusseldorf “Inflation exceeds expectations”: This report itself has meanwhile taken on an inflationary character. It overtakes consumers month after month with a reliability that not even the most notorious of German inflation warners would have predicted.
It was 7.9 percent in Germany in May. The inflation rate is thus at the record level of the winter of 1973/74. Inflation is here to stay – and who, if not the central bank, is responsible for it?
For months, ECB President Christine Lagarde and her team defiantly stuck to their interpretation of the data. At first it was just “base effects”, later “pandemic-related special effects”. Then “only” the strongly fluctuating energy prices or food prices caused the dynamic price development.
But it was always a “temporary phenomenon” – according to the mantra of the ECB. Whenever there was no other option, the central bank also admitted that the inflation outlook was probably too optimistic – and associated with “great risks”.
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From today’s perspective, the reassurances seem like mockery. Firstly, because half a year ago they were miles away from reality. Secondly, because it is simply not the job of a central bank to appease.
On the contrary: central bankers must act as an early warning system. Or more precisely: economic actors must be able to trust that the central bank will act accordingly.
Here the ECB can, indeed must, be accused of negligence – regardless of base effects, supply chain problems and the energy price shock caused by the war. If the central bank hesitates too long and inflation expectations have taken root, then the fight against price increases can only be waged at the price of a recession. The ECB may already be in this situation, so the announcement of the first interest rate hike for July comes far too late.
Different countries, same bad habits
It is of little consolation that other central banks are no different. The US Federal Reserve has also hesitated too long, so it may have to risk a recession to keep inflation under control. In the end, there could be a threat of stagflation in both the USA and Europe, i.e. the combination of weak economic development and high inflation rates.
However, there is still a special risk in Europe that should not be underestimated: In contrast to the Fed, which is considered to be largely free in its decisions, the ECB will have to take the highly indebted countries of Southern Europe into consideration. If capital market interest rates skyrocket, they could face refinancing problems. A euro crisis 2.0 would be the result.
“Price stability prevails when people have stopped talking about inflation,” US economist Alan Blinder once said. Europe and the USA are a long way from this situation. There is much to suggest that 2021 and 2022 will go down in history as the years when inflation, which had been thought dead, made a lasting return to the industrialized world.
More: Analyst forecasts exceeded: inflation in Germany rises to 7.9 percent