The high energy prices have pushed the inflation rate in Germany above the four percent mark for the first time in 28 years. The prices rose in September compared to the previous year by 4.1 percent, announced the Federal Statistical Office in its preliminary calculation on Thursday. This is the highest price jump since 1993. The energy prices have increased by 14.3 percent, for food the plus was 4.9 percent. Consumer prices rise very differently depending on the sector. In the case of car fuels, the price increase was recently more than 20 percent, and light heating oil was even more expensive by more than 50 percent. The average inflation rate in Germany could climb up to five percent by the end of the year, the Bundesbank forecast in its current monthly report.
Special effects also play a role in the development of inflation rates in Germany. Since January 1, the usual VAT rates of 19 and seven percent respectively have been in effect in Germany after they had been reduced in the previous year due to the corona pandemic. In addition, since the beginning of 2021, a CO₂ tax of 25 euros per tonne of carbon dioxide emitted has been due, which is generated when diesel, petrol, heating oil and natural gas are burned. There is also a base effect: because inflation rates are compared on an annual basis, the massive price drops at the beginning of the corona lockdown have a mathematically strong impact.
The sharp price increases in Germany are not an isolated phenomenon. In the USA (five percent), Great Britain (just under four percent) and other euro member states, inflation rates are climbing faster than they have been in a long time. The main reason is delivery bottlenecks. The shutdown of the economy in the corona pandemic resulted in interruptions in supply chains and production losses. This shortage of supply is now meeting extremely strong demand as people and companies follow their previous consumption and production routines very quickly after the lockdown has ended. As a result, prices are rising steeply in some sectors.
The ECB believes that the high inflation rates are a temporary phenomenon. The situation will calm down in the coming year. ECB President Christine Lagarde said that one should “not overreact” because of temporary disruptive factors such as the price drivers triggered by delivery bottlenecks. In the euro zone, the inflation rate was three percent in August, well above the target of two percent.
Rising prices weigh on low-income people and the unemployed who depend on government aid. Trade unions and social associations are therefore demanding that the new federal government recalculate the Hartz IV rates. The planned increase of three euros per month is too low. “From our point of view, one cannot speak of an increase. It is an actual cut,” said Michael Rudolph from the German Trade Union Federation Hesse-Thuringia. “People will feel less money in their pockets, they will lose purchasing power.”
An end to cheap money carries risks
How will the central banks react to the rising prices? If the textbook had its way, the monetary authorities would have had to tighten their loose monetary policy. But an end to cheap money carries risks. The exchanges have got used to it. An excessively abrupt or poorly communicated increase could lead to price losses on the financial market. On the other hand, investors take the higher inflation into account in their value calculations anyway.
The central banks have distorted the price structure on the stock exchanges through their zero interest rate policy and the purchase of bonds worth billions of euros. Even very risky promissory notes that are at risk of default are financed at the cheapest prices in the wake of loose monetary policy. At the same time, the loose monetary policy helped to contain the dire economic consequences of the global financial crisis in 2008, the euro debt crisis in 2012 and the corona pandemic in 2020.
US Federal Reserve Chairman Jerome Powell fears that high inflation and material shortages will affect the economy for longer. It is frustrating to see that the supply chain problems are not getting better, Powell said on Wednesday at the ECB’s central bank forum: “At the moment they seem to be getting a little worse,” Powell said. The problem will probably drag on into the coming year and also keep inflation at a higher level for longer than expected. Powell acknowledged that the supply shock and its effect on inflation had been underestimated.
The inflation trend has long been considered a mystery in many scientific circles, especially because prices have barely increased in the past decade, despite the loosest monetary policy of all time. “We lack a general theory of inflation,” said former London School economist Charles Goodhart at the ECB Central Bank Forum. The old theories about inflation would no longer work, such as looking at the money supply or the unemployment rate. Goodhart, a member of the UK Central Bank’s Monetary Policy Committee from 1997 to 2000, points to the current driver of inflation: the growing global labor shortage. Their bargaining power is growing, and significantly higher wages are the result. In a year or two, inflation in the industrialized countries could rise significantly more than most people and central bankers expect. Goodhart believes an inflation rate of five percent and more is conceivable, also because he fears de-globalization. The background: Due to the trade disputes between the USA and China, some branches of the economy could bring their production “home”, which would increase costs and thus inflation.