Inflation in Germany also rose in June. The prices were 2.3 percent higher than in the same period last year, as the Federal Statistical Office announced in its preliminary estimate on Tuesday. In May the rate of inflation was still 2.5 percent. Once again, energy prices in particular rose by almost ten percent. The rise in costs over the past six months is striking, as prices had fallen by 0.3 percent in December. Experts anticipate that the rate of inflation could rise to four percent this year. However, special factors play a role. In Germany, the VAT rates were raised again to the usual level at the turn of the year after they had been reduced in the previous year due to the corona pandemic. In addition, a CO₂ tax of 25 euros per tonne of carbon dioxide emitted has been due since the beginning of 2021. That drives up the prices for heating and refueling. In addition, there are supply bottlenecks in certain sectors, which increases the price pressure in the short term.
Rising inflation rates are a global phenomenon. In the euro zone, the increase in May was two percent, in the USA even five percent. The central banks are alarmed. The ECB will possibly follow the example of the American Federal Reserve and tolerate inflation rates above the self-imposed mark of two percent in the future. The debates on this strategic shift are currently ongoing. The price development is also monitored very closely at the BIS in Basel, the central bank of the central banks. “The greatest risk to global financial stability is inflation,” said the research chief of the Bank for International Settlements (BIS), Hyun Song Shin, the SZ in an interview. “If prices rise permanently, it will affect the bond markets, the cornerstone of the financial system,” said Shin. The expert fears higher bond yields in this case. These could affect the sustainability of public finance because the interest on borrowing would rise.
“We cannot rule out the possibility of a permanent rise in inflation. But that is not the most likely scenario at the moment,” continued Shin. “It is more likely that inflation will subside again next year, because then the base effects no longer work and supply bottlenecks are resolved. Only if we saw a rise in the prices of all goods and services would we have to worry.”
Citizens feel the price increases much more strongly
The return of inflation is a political issue, both in Germany and in Europe. Every year the EU Commission finds in surveys that the citizens perceive the price increases much more strongly than the EU statistical authority Eurostat shows. The official inflation rate at the beginning of this year was around one percent, but people put their personal inflation at 4.5 percent. In addition, there is the effect that necessary expenditures, for example for food, rent and energy, make up a larger share of the budget for less financially strong families than for wealthier families. Rising prices tend to affect low-income households harder.
In particular, the weighting and measurement of housing costs in the shopping cart do not match the reality of consumers. House prices rose by up to 50 percent in major European cities between 2015 and 2020, and those who moved noticed that rents also rose significantly. Large parts of the population have to spend almost half of their disposable income on housing costs, reports the Federal Statistical Office. According to experts, the cost of owner-occupied residential property is given too little weight in the inflation shopping cart. This problem should now be resolved.
The discrepancy between official inflation measurement and inflation perception could weaken citizens ‘trust in the central bank, and this at a time when the ECB is campaigning for trust in the development of the digital euro, which in a few years’ time should complement traditional cash. “Central bank digital money is a further development of the existing financial system. It is an evolution, not a revolution,” said BIS research director Shin. The use of cash is an excellent sign of confidence in the central banks. Digital cash will have the same role, only that it will be carried with you on your smartphone instead of in your wallet.
“Digital central bank money is not a technological gimmick, it is a basic building block of how one would build a solid financial system,” says Shin, who thinks little of the crypto currency Bitcoin: “Bitcoin has no monetary function, it is a speculative asset. That is very much now Sure. In real life, Bitcoin also facilitates money laundering and the handling of blackmail by software Trojans. “