Anyone who thought inflation was going down is wrong. The jump in producer prices in Germany by almost 46 percent year-on-year and – even worse – by almost eight percent in one month means that bad things can be feared for consumer prices. Ultimately, these are war costs. The breakdown shows that the jump is directly or indirectly due to the increase in energy prices.
Nobody can magic away the costs of a war or a pandemic. The only question is how and how they are distributed to the citizens. And the European Central Bank (ECB) has little influence even on this. Governments are also finding it difficult to exercise meaningful influence, as the heated debates about debt or the gas surcharge make clear.
The classic reaction to such a “supply shock”, i.e. inflation not caused by strong demand but by scarce resources and capacity, is very simple: wait until it is over. This is how the ECB initially reacted last year. The alternative is: Destroy so much demand that it matches the scarcer supply. Translated, this means: Destroying companies and jobs in order to cut the economy down to the right size. This route would probably have fought inflation more effectively, but turned inflation costs into recession costs and ultimately increased them through permanent job losses.
Waiting, however, harbors the risk that inflation will become more permanent and thus also generate additional costs. It was therefore right that the ECB, despite the risk of recession, recently tackled inflation with a significant interest rate hike. In Europe, unlike in the USA, there has so far been little evidence of a steadying of inflation, for example due to rising wages. But monetary policy, which in any case only works with a time lag, cannot rely on this. So now some of the inflation costs are being turned into recession costs.
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The ECB should probably have raised rates sooner. The bigger mistake last year, however, was communication that sounded too careless and relied on models that were unreliable in times of crisis. It has damaged the credibility of the ECB – and that also generates costs.
More: Why inflation in the US and Europe has different causes