For long-term high inflation, wages would also have to rise more sharply. There is no evidence of that. There are also many structural trends that speak in favor of lower inflation.
Inflation in Germany continued to rise in November as well. That scares a lot of people. But there is still a lot to suggest that the price surge is temporary. One effect will certainly be over by the end of 2021: The federal government temporarily lowered VAT in the second half of 2020, which makes today’s prices look higher compared to the previous year.
It is harder to predict how long disruptions in supply chains and shipping will last. But that doesn’t change the fact that these problems will also be resolved at some point. It is similar with the oil price: It collapsed at the beginning of the pandemic and then rose sharply again. However, the increase is unlikely to continue at the current pace.
What matters now is whether wages follow prices, which could lead to a dangerous spiral. A look at the pay slip helps here. According to the union-affiliated economic and social science institute (WSI), collectively agreed wages rose by 1.6 percent in the first half of the year – significantly less than in previous years. Even the train drivers’ union GDL, which paralyzed the country with strikes in the summer, only achieved a wage increase of 3.3 percent for the very long period of 32 months. This shows that the power of the trade unions has dwindled.
The argument that the recent sharp rise in national debt must automatically lead to high inflation is also misleading. Japan provides the best counterexample: The country has by far the highest national debt of the developed economies, but hardly any inflation.
There are also many structural trends that speak in favor of lower inflation. So digitization has a price-dampening effect. Online shops such as Amazon or hotel portals make it much easier to compare prices and thus increase competition. In addition, the aging of society means that more people save more of their income. Inflation warners argue that workers are becoming scarcer as the population ages and that wages should therefore rise more sharply. But here, too, Japan offers the opposite example.
If the price surge continues despite all these arguments, then there are still the central banks. You have decades of experience fighting inflation. There is a reason that the markets are currently very sensitive to high inflation figures. They know that if the price increase persists, the central banks will tighten their monetary policy – which would be bad for stocks.
Cons: The danger is real
The ECB’s eternal appeasement formulas are fueling fears of inflation. A clear signal would have been required as early as the summer that the central bank was at least taking the risk of inflation seriously.
From Jens Münchrath
The long refusal of the ECB to even enter into a debate about the changed inflation situation is as astonishing as it is alarming. The same mantra-like appeasement formulas by ECB President Christine Lagarde now seem to have fallen out of time.
So prices in Germany rose by 5.2 percent in November – and it is likely to become increasingly difficult for central bankers to maintain their stoic view of inflation. Because base effects and pandemic-related special factors: there is now consensus among economists that the inflation panorama has fundamentally changed – not only in Germany, but across Europe.
Even if rates fall temporarily in the coming year because of the effects mentioned – there are many reasons why medium-term inflation could be well above the central bank’s two percent target, and they have been mentioned many times: acute shortage of skilled workers due to the aging of the Society, growing protectionism, which is driving up import prices, and above all the politically deliberate increase in the price of energy in the fight against climate change.
In addition, the US Federal Reserve, unlike the ECB, has a fixed exit plan – and is implementing it quickly. The difference in capital market rates between the US and Europe will weaken the euro, however. The result: Europe also imports inflation.
All of this is worrying. Most worryingly, however, there are reasonable doubts as to whether the ECB would have the freedom to tighten monetary policy if its overly optimistic inflation outlook is not confirmed. Because unlike the Fed, the ECB has to take the over-indebted states of southern Europe into consideration. When capital market rates rise, doubts quickly arise again in the financial markets as to whether they can service their national debts.
In the end, the ECB has robbed itself of its own room for maneuver with its rescue policy. A clear signal that the central bank is at least taking the risk of inflation seriously would have been required in the summer. Because financial history has shown that inflation expectations are crucial: inflation comes when people believe it is coming.
This belief in turn largely depends on the level of confidence in the central bankers to ward off inflationary tendencies at an early stage. Christine Lagarde’s stoic attitude does not necessarily help to strengthen this trust.
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