A brief look back at the dark summer of 2022: It is foreseeable that Russia’s war against Ukraine will not end anytime soon. Inflation rises and rises. Europe and especially Germany must fear that energy will run out in winter. It seems certain that the continent will slide into a severe recession, the only question is how deep it will be.
Six months later, the situation looks almost rosy. Concerns about energy shortages have evaporated – also because of the mild winter. Inflation is on the decline. Hardly anyone is talking about recession in Europe anymore. And on the stock exchange it’s as if the terrible year 2022 hadn’t happened: The German share index is higher today than it was a year ago.
On Thursday, the Deutsche Börse barometer once again rose by around two percent. Above all, investors are celebrating the decision of the US Federal Reserve to raise interest rates by just 0.25 percentage points, after several steps of 0.50 and 0.75 points before. They interpret it as if the normality of the past few years would return to the capital markets. And this normality was such that the central banks fought every emerging crisis with ever lower interest rates, with ever more purchases of government bonds, with an ever larger flood of money.
But the players on the capital markets should not be mistaken, because nothing is normal here. There is a big difference to the situation in the years before 2022, and that makes it impossible for the central banks to return to the easy money policy. It can be summed up in one word: inflation.
As things stand, the capital markets are overly optimistic about the situation. They are probably being dazzled by the slight decline in inflation in Europe and the US over the past two months. In Europe it is currently still 8.5 percent. But the situation is deceptive, the specter is far from over, as can be seen by looking at the actually more important indicator, the core inflation rate. It measures the rise in prices excluding heavily fluctuating commodities such as energy or food. And it has not fallen, but at 5.2 percent it is higher than it has ever been since the introduction of the euro. This is a sign that inflation is not declining, but rather solidifying.
More and more companies are increasing their prices because they feel compelled to do so or believe they can afford to. The danger of an ever-twisting spiral is far from over. And as good as it is that there is no longer any threat of recession – if the economy in Europe continues to grow reasonably quickly, that will not have a dampening effect on inflation.
Something has been forgotten in the years leading up to 2022: that the most important task of a central bank is to ensure stable prices. High inflation undermines the economic and social foundation of a society. The European Central Bank (ECB) long underestimated the rising price increases last year. In the meantime, it has demonstrated its willingness to fight inflation with a number of sharp rate hikes. The decision on Thursday to raise key interest rates by 0.50 points and hold out the prospect of a further 0.50 points for March is also a clear and positive signal.
The ECB must not let up in its fight for stable prices. This is all the more true as there are certainly other voices in your decision-making body. There are calls to stop raising interest rates and lower them again in the second half of the year. So that one could return to the kind of monetary policy that the capital markets appreciate so much.
In this respect, inflation also has something good: it helps the central banks to abandon their long-term disastrous monetary policy. Because what happened between 2008 and 2022 was not normal. It would be normal to get away from indirect state financing and from flooding the economy with more and more cheap money.