Economist Schularick: Inflation – just a “historical footnote”?

Is inflation here to stay? No, says Moritz Schularick. The economist joins in the conversation tagesschau.de even hope for a trend reversal – at least in Europe.

tagesschau.de: Inflation has been rising in Germany, throughout Europe and also in the USA since 2021. What exactly triggered this development?

Moritz Schularick: Mostly the sharp rise in energy prices in the wake of the Russian war of aggression in Ukraine. In addition, we started out of the pandemic at the same time, so many countries reopened their economies at the same time, so that consumption picked up again. That put a lot of pressure on prices last year. In some cases, the supply chains could not keep up.

The situation on the labor market was also very good, so that many people found work very quickly and the unemployment rate was very low. Against this background, the war in Ukraine brought inflation rates to where we are now, around eight, nine, ten percent – depending on where you look in Europe. So quite clearly: the bulk of inflation comes from energy.

Is there a trend reversal?

tagesschau.de: One home remedy is for the central banks to raise interest rates. This is now happening relatively energetically in the USA, the ECB is a bit more hesitant. And yet: a trend reversal is not really in sight. Why is that?

Schoolarick: The situation in Europe is indeed different from that in the US. Inflation in the US is the same as in Europe, but they aren’t struggling with higher gas prices. If you think of petrol prices, for example: they are currently as high as they were at the beginning of the year. In the US, inflation is truly homegrown. The demand there is too strong. The economy is booming and overheating in the sense that price pressure is developing. In Europe, energy sources, which have recently increased by more than 40 percent compared to the previous year, are the main driver of inflation. In this respect it is also correct that the European Central Bank (ECB) and the American central bank, the Federal Reserve, reacted at different speeds.

Nevertheless, I think that there are signs of a trend reversal: on the one hand due to the cooling off of the economy and on the other hand because we are apparently quite successful in saving gas in Europe. As a result, expectations for gas prices for next year have fallen significantly. This means that we could also get into a situation in which inflation rates tumble in Europe next year and fall again much faster than in the USA.

tagesschau.de: You indicated it: there are different forms of inflation. One speaks of supply-induced, demand-induced and also of imported inflation. What are the differences?

Schoolarick: In fact, we have different types of inflation, from price pressures in the economy at the moment. What we are seeing in Europe and in Germany is price pressure, i.e. rising prices that are due to the fact that we are paying much higher prices for imported goods, energy and gas. This is then also reflected in the costs of domestic electricity production, for example. But it is primarily supply-side inflation. This is what economists will call a “supply side shock”. That means we simply have prices that come from the outside that we have to deal with. We can’t do much about it ourselves.

It would be different if we had a situation domestically where the demand for goods and investments and services is so high that we can no longer keep up with what we produce. So far there have only been relatively weak signs of this at European level and also in Germany – and there are also relatively weak signs that these high energy prices are already clearly translating into the prices offered for services or other goods. This will certainly change to a certain extent in the coming months. But overall so far it seems very much focused on the supply side of energy prices and energy intensive goods.

“A Ritualized Debate”

tagesschau.de: Let’s look at Germany. The end of the low-interest phase has at least been heralded, and the ECB is gradually raising interest rates. What are the consequences for the German national debt?

Schoolarick: In principle, I would rate the development of interest rates and the interest rate policy of the ECB as very positive and correct. There was a reaction to the rising inflation rates. That makes sense to everyone: if the ECB raises interest rates, then there will be no more gas, and Russia will not start delivering again either. In principle, the central bank has to worry about the second-round effects. They want to dampen demand a bit so that inflation expectations remain stable overall and so that we as citizens also understand that this is now a one-off thing. That has a lot to do with the war and maybe also a bit with the pandemic. But that has nothing to do with how we do business, with how the ECB conducts monetary policy, and also with how the governments and states in the euro zone conduct their fiscal policy. In my opinion, these are really secondary or even third-rate factors.

Of course, the fact that the ECB is now taking countermeasures so strongly has consequences. It has implications for interest rates. For example, if you want to buy a house or an apartment, you will see that interest rates have risen sharply. And that also has consequences for the national debt. Not immediately, because the national debt does not have to be completely refinanced every year – but over the next few years it will mean that the times when the state had to spend less on interest payments on its debt year after year are over. And we will now have to gradually adjust to the fact that interest rates on government bonds will rise again and that the interest costs in the federal and state budgets will also go up again.

tagesschau.de: Against this background – how do you feel about the question: adhere to the debt brake next year – or rather not?

Schoolarick: This has become a bit of a ritualized debate in Germany. I think we are facing unique challenges. Even if you look at economic history, it’s actually clear: These are states that are now confronted with such serious challenges as a war – ultimately on Europe’s doorstep, on the doorstep of the EU – and of course with the corresponding consequences for the energy markets. This is not just any war, any warring faction, but Russia, which attacked Ukraine and which until recently was our main energy supplier. This is a historically unique situation. And then it is also quite possible and conceivable to suspend the debt brake again if it turns out that we need it to get through this winter and to master this challenge. Then you have to take note of the historical peculiarity.

In ten, 20, 30 years we will no longer be looking back at 2022 and 2023 and asking ourselves: “Was the inflation rate in Germany 4.3 or 5.1 percent?” Or: “Did we suspend the debt brake for a second year or not?”, but the question will be: “Did we manage to face this challenge together as Europe? Did we manage this Russian war of aggression and its economic consequences overcome together?” And the rest are historical – and I would like to say economic policy too – footnotes. A good dose of Anglo-Saxon pragmatism would do us good instead of always having these excited debates about symbols.