Berlin The record inflation rates may not be over yet. The I-Index, an early warning system for consumer price developments based on media articles, has reached an all-time high. In April, the indicator rose to 10.9 percent. This means that inflation played a role in more than one in ten newspaper articles published this month.
A year ago it was two percent and the historical average between 2001 and 2021 is also significantly lower. It also shows that the I index is still rising significantly three months after the start of the Ukraine war. The aftermath of the war is considered the main driver of inflation.
According to the Federal Statistical Office, the increase in consumer prices in Germany was 7.4 percent in April compared to the same month last year – the highest in 40 years. In relation to the previous month of March, however, the price increases were significantly slowed down.
“Nevertheless, there are some indications that the end of the record inflation is far from being reached, as shown above all by the I-Index,” says project manager Henrik Müller from the TU Dortmund. Volker Wieland, Director of the Institute for Monetary and Financial Stability, also explains: “The indicator is higher than ever. Inflation is obviously at the center of public interest, and that’s not likely to change anytime soon.”
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You can find all the scientific background to the new evaluation of the I-Index in the paper by the University of Dortmund.
Central banks are given less attention
The indicator can act as an early warning system because it provides detailed insights into consumer and business expectations. And inflation expectations are crucial in determining whether inflation will pass or persist.
If consumers and companies adjust to rising prices over the long term and adjust their behavior accordingly, inflation becomes entrenched. The media are decisive for the expectations, but this influence has hardly been researched so far.
The “Dortmund Center for data-based Media Analysis” (DoCMA) of the Technical University of Dortmund has therefore developed the I-Index with the Handelsblatt and published it for the first time in March 2022.
It is based on the analysis of around three million newspaper articles. In addition to searching for the term “inflation,” algorithms filter for related terms, making associations and forming clusters that can inform inflation narratives and influence expectations.
Relevant changes can also be seen in the development of these subject areas. In Germany, the central banks have always been the focus of reporting on inflation. This line of sight had clearly intensified when stronger price increases could be observed in the past few months. But now the central bank narrative is going in the other direction.
In January 2022, more than 14 percent of inflation articles were still about central banks. In April it was only ten percent, although the increase in consumer prices increased significantly. Instead, commodity prices have come to the fore. The main reason is the sharp increase in the price of energy, which has pushed the central bank issue to a certain extent.
There were enough occasions for the classic reports. During this period, leading representatives of the European Central Bank (ECB) made a U-turn in their policy. After the central bankers had implemented waiting as a credo for months, President Christine Lagarde has been preparing a new course for a few weeks. A first rate hike is considered likely in July.
A wage-price spiral cannot be ruled out
Experts see the shift in attention away from the central banks as a danger. “It reminds me of the 1970s,” says Stanford University economist John Taylor.
At that time, too, a crucial problem was that it was said that oil prices were to blame – and that the central banks had nothing to do with any of this. “The concealment of the possibility of monetary policy intervention carries the risk that the problem will become even more entrenched,” warns Taylor, a former US Treasury Secretary.
It is also noticeable that wage developments are falling slightly as part of the reporting on inflation. Rising wage demands are seen as a potential risk of inflation becoming entrenched.
If workers are paid higher wages to compensate for inflation, the costs for companies increase, which in turn raise their prices. A dreaded wage-price spiral can arise.
So far, such a spiral is not foreseeable. Most economists assume that wage growth will not be able to compensate for the loss in purchasing power. The federal government expects employee compensation to grow by 5.1 percent in 2022, but the projected inflation rate is 6.1 percent.
Businesses and how they deal with inflation
However, it is a fallacy to say that the falling I-Index would banish the danger of a wage-price spiral in this area. “Although there has been a small drop recently, it doesn’t have to be a trend by a long shot,” says the former economist Wieland. The wage narrative had previously risen extremely. “That suggests that significantly higher wage demands and settlements are coming.”
And the observation of the wage issue is somewhat distorted because many larger wage rounds are still pending this year, which will automatically lead to increased focus and increased reporting on this topic. “As long as it is not clear what the ECB is doing, the unions will not hold back either,” says TU Professor Müller.
The methodology of the I-Index
Due to the uncertainties regarding the further development of inflation, the joint idea of Handelsblatt and scientists from the Technical University (TU) Dortmund came up in November 2021 to use the informative value of media reporting.
The project was implemented by the “Dortmund Center for data-based Media Analysis” (DoCMA), which is based at the TU and is a collaborative project of communication scientists, economists and statisticians. There the model was baptized “Inflation Perception Indicator” (IPI, Inflation Perception Indicator), for the sake of simplicity it is also called the I-Index.
The I-Index project is headed by Henrik Müller, Professor of Economic Journalism. The researchers Tobias Schmidt, Jonas Rieger, Lena Marie Hufnagel and Nico Hornig are also involved. Over the months, the project was also accompanied by TU econometrician Carsten Jentsch and Torsten Schmidt, head of economic activity at the Leibniz Institute for Economic Research (RWI) in Essen.
The index is based on a model that brings together communication sciences and economics with the help of IT-supported processes. The methodological basis is provided by so-called “topic models”, which help to make content patterns in large amounts of text visible. The Dortmund researchers have developed a method that enables them to calculate time series using a dynamic topic model.
The results also make it possible to identify causal relationships in the reporting. From these, “narratives” can be derived that determine expectations of consumers and companies when it comes to inflation.
The concept of narrative can unearth novel insights into current inflation dynamics, as it places available figures on price expectations in a context of content. Which causes of inflation are addressed and who is to blame for rising prices all play a role in the formation of inflation expectations, but have so far been an aspect that has been underexposed in research.
The I-Index is based on around 2.9 million newspaper articles that appeared between January 1, 2001 and February 28, 2022. They come from the “Süddeutsche Zeitung”, the “Welt” and the Handelsblatt.
“The ‘Süddeutsche’ is center-left in the economic policy discourse, the ‘Welt’ center-right, and the Handelsblatt reflects the specific economic reporting,” says project manager Müller. Thus, the average of the published opinion can be mapped with the I-Index. “In this way, we avoid the risk of the results being falsified by loudly expressed extreme positions, which undoubtedly exist when it comes to the emotional issue of inflation.”
Articles dealing with the topic of inflation were extracted from the entire articles. A little more than 50,000 items went into the detailed analysis.
ECB board member Isabel Schnabel recently said: “There is no doubt that higher wage demands will come if inflation remains so high for a long time.” The board of IG Metall, for example, has already decided to increase wages by 8.2 percent at the upcoming to call for a round of steel.
The fact that inflation has been playing a role in corporate reporting for the first time in the past few weeks could also speak in favor of consolidation. The price increases do not remain an abstract phenomenon, but come to many companies in the form of higher purchase prices, which they increasingly pass on to their customers.
More: The I-Index – The new measurement of inflation