The dynamics of price increases in Germany weakened somewhat in January. The inflation rate was 4.9 percent, as the Federal Statistical Office announced in its first estimate on Monday. In December, the inflation rate was 5.3 percent – it was the highest level in almost 30 years.
Overall, however, it remains the case that citizens need significantly more money to finance their livelihood. Above all, the prices for energy (plus 20.5 percent) and food (plus five percent) have increased significantly again. This mainly affects low-income households. Federal Finance Minister Christian Lindner (FDP) now wants to abolish the so-called EEG surcharge more quickly than originally planned because of the sharp rise in electricity costs. According to Lindner, people felt the inflation caused by expensive energy. The EEG surcharge is the electricity price surcharge for the expansion of renewable energies.
The federal government is also planning to compensate for the increase in energy costs for citizens with climate money. The funds are to be taken from the state’s billions in revenue from CO2 pricing. However, economists at the Spanish central bank have found that climate money that is distributed directly to the people will drive inflation even more, at least in a transitional phase.
The debate about the price effects of government measures to achieve climate targets is in full swing. The politically desired increase in the price of CO2 emissions has a potential effect on all sectors of the economy. The restructuring could therefore lead to higher inflation, warns ECB Director Isabel Schnabel. It’s a dilemma: If rising CO2 prices and billions in investments in green technology cause inflation to rise too much, the central bank would have to step in and raise the key interest rate. This in turn could slow down further investments in climate change and thus delay the transition to CO2 neutrality.
Meanwhile, the ECB is sticking to its zero interest rate policy. The currency watchdogs are expecting an inflation rate of 3.2 percent for the euro zone this year, but the head of the central bank, Christine Lagarde, is assuming that the price dynamic will slow down this year. The ECB decided in December to let the €1.85 trillion pandemic emergency program expire at the end of March as planned. Nevertheless, the central bank’s bond purchases continue in two respects: if government bonds are repaid from the pandemic emergency program, the ECB puts the repayment amount back into the bond market. In addition, the central bank is doubling the still existing bond purchase program from the Draghi era to 40 billion euros per month at times.
With the continuation of its loose monetary policy, the ECB is treading a special path. The Bank of England was the first major central bank to raise interest rates shortly before the turn of the year in view of the high inflation of almost five percent. The American Federal Reserve will also raise interest rates this year – the inflation rate there was just under seven percent most recently.
The EU statistics agency Eurostat will publish the level of inflation in the euro zone for January on Wednesday. In December, prices in the euro zone had risen by an average of five percent – that was the highest value since inflation measurements for the European monetary union began in 1997. The Governing Council of the ECB will meet on Thursday to decide on further action. Some members do not believe that inflationary pressures will ease any time soon. In view of the price development, experts on the financial markets are already expecting a key interest rate cut in the autumn, and Lagarde has officially insisted on doing this in 2023 at the earliest. The head of Norway’s sovereign wealth fund, Nicolai Tangen, warned on Monday in the Financial Times, before persistent inflation: “We see price increases all over the world, in food, in freight rates, metals, raw materials and also in wages.” Tangen is responsible for assets of 1.3 trillion dollars for Norway – it is the largest sovereign wealth fund in the world.