The inflation rate in the euro area rose by 7.5 percent in March.
(Photo: dpa)
Someone always pays. It would be an illusion to think that the world can overcome the three big Cs – disease, war and climate change – without costing anything. Depending on how monetary and financial policy works, it is decided who has to bear these costs and when. But it would be naïve to believe that the “right” or particularly “decisive” policy can simply magic them away.
The high inflation of 7.5 percent in the euro area is the bill for the first two crises: Corona and war. When energy prices rise and preliminary products for industry cannot be produced in China or cannot be transported from there, shortages are created.
Prices are now doing what they are for in a market economy: they indicate that scarcity. Of course, the European Central Bank (ECB) and governments can influence what is happening. But in the end they only redistribute the costs. It should be noted that when the government subsidizes energy prices, it strengthens demand and thus contributes to inflation.
Wars have often been financed by inflation, often after the fact. That was already the case with the great devaluation of money in Germany after the First World War, which still shapes the attitude towards money in this country today. The empire was broke, the young republic inherited a mountain of war bonds and had only the choice of declaring itself insolvent or printing money.
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The question still arises today: What would be the alternative to inflation? The ECB cannot make scarce energy cheaper. If the relative price structure shifts dramatically, a central bank can of course try to depress prices in some sectors so that the bottom line is that the average stays within limits. But that would be the method: operation successful, patient half dead.
Waiting is not an option
Unfortunately, the ECB has lost some credibility, making it more difficult for them to strike the right balance without letting prices spiral out of control. Like the US Federal Reserve (Fed), it dramatically underestimated how persistent inflation would develop last year. In doing so, it has earned the reputation of having overslept the development. You can’t blame her for not foreseeing the war, but that is now driving up prices even more.
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What can ECB President Christine Lagarde and her colleagues do now? Just waiting for things to get better is not an option. Bluntly beating prices with very harsh measures would significantly weaken the economy, which is already burdened by high energy costs. Ideally, the ECB succeeds in letting those prices run which it cannot influence and which in any case only indicate real shortages, without losing control over the other prices.
Above all, it is important to curb the wage-price spiral and to keep inflation expectations, which have so far remained surprisingly stable, in check. This split is open-heart monetary policy surgery and, as the often lopsided forecasts of the past show, in rather poor light. It only works with crystal-clear communication, which must also serve to strengthen the ECB’s credibility again.
More: Crises and inflation – a look at history.