Double-digit inflation rates cannot be ruled out either in the USA or in the euro zone. Many economists should be happy to have the war in Ukraine as an explanation for the unforeseen rise in prices. Prices rose even before the Russian attack: in February by 7.9 percent in the US and by 5.9 percent in the euro zone on an annual basis.
Keynesian-oriented economists in particular fail to appreciate the importance of money supply growth for the development of inflation. Keynesians see aggregate demand as the determinant of production and employment.
It should come as no surprise that growth rates in the M3 money supply of over 40 percent in the USA and 18 percent in the euro zone have been reflected in prices since February 2020.
M3 includes, but is not limited to, cash, current account deposits, and commercial paper and debt securities. According to economists, a strong increase in the money supply can be a sign of rising inflation in the medium to long term.
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Although inflation has surprised many economists, they cling to the notion that it is temporary. They warn against tightening monetary policy. The declining growth of the money supply supports this view.
Politics amplifies the trend towards higher prices
However, other approaches to explaining inflation are gaining in importance: Tense labor markets create bargaining power for employees and thus higher wages, the costs of energy and raw materials as production factors are rising noticeably, also – but not solely – because of the war.
Daniel Stelter is the founder of the discussion forum beyond the obvious, which specializes in strategy and macroeconomics, as well as a management consultant and author. Every Sunday his podcast goes online at www.think-bto.com.
(Photo: Robert Recker/ Berlin)
Demand for bank loans is picking up, especially in the US. The aging of society leads to a higher dependency ratio and the trend towards globalization has not only stopped but is being reversed.
Does it make sense for a central bank to brace itself against such inflationary tendencies? Historically, the answer is yes. From 1973 to 1975, prices in Great Britain rose by 57 percent, in Germany only by 21 percent, although the oil price shock hit both countries. The Bundesbank countered earlier and more consistently.
Unfortunately, there is nothing to suggest that the European Central Bank (ECB) will follow this example. On the other hand, a monetary policy that is geared more to the favorable financing of government deficits than to currency stability speaks against it.
Politicians are reinforcing the trend towards higher prices. New spending programs are constantly being decided on credit and the costs of the energy transition are being burdened more and more openly on the citizens. For example, the obligation to use heat pumps from 2024 may lead to lower energy requirements, but where should the specialists come from to install the required number of systems?
The result is stagflation: Demand for many goods falls because the private sector has less net cash to spend. Prices still rise because what needs to be in demand is scarce. How convenient when you can then blame everything on the war in Ukraine. In truth, it is politics that leads to an impoverishment of the middle. This is not a program for social stability.
More: Lagarde expects less growth and higher inflation in the short term