Status: 10/13/2022 4:02 p.m
Ten percent inflation – inflation in Germany was not even that high after the oil price shock since 1973. The ECB is therefore even more challenged than the Bundesbank was then.
Three generations of the Etzelmüller family from Gießen are gathered at the dining table for coffee and apple pie: grandparents, parents and the two grandchildren of kindergarten age. A topic of discussion at Sunday’s meeting is the rising price of energy and food. For Klaus Etzelmüller, 66 years old, long-forgotten memories come up.
Etzelmüller experienced car-free Sundays and big price jumps, peaking in December 1973 when the inflation rate was 7.8 percent. As a war generation, his parents were still familiar with hardships. “Of course, the rising prices were a burden at the time,” remembers the grandfather with two children. “But the current situation is putting a lot more strain on young people.”
For son Erik, 35, exploding costs are a whole new experience. The gas bill for your own home, for example, has doubled to 5,000 euros a year, and weekly shopping is estimated to be a third more expensive. The first flight planned for next summer with the two children to Mallorca is already shaky in the fall. Even a typical, double-income, middle-class family needs to save when prices gallop like they did back then.
Inflation History – An Overview
Steffen Clement, HR, plus minus 9:45 p.m., October 12, 2022
Expert thinks the ECB is too optimistic
Katrin Assenmacher, Head of Monetary Policy Strategy at the European Central Bank (ECB) in Frankfurt, also sees many similarities with the 1970s. “As then, we now have an increase in energy prices that leads to high inflation.” Nothing will change about that next year. “But we expect that in 2024 inflation will again be close to our target of two percent.”
Volker Wieland, a financial expert at Frankfurt’s Goethe University, considers this assessment to be “much too optimistic in the current situation”. Past experiences with the central bank have made him skeptical: “The ECB regularly forecasts that the inflation rate will be back at the target value of two percent in two years at the latest.”
Bundesbank increased key interest rate to 13 percent
It is now the task of the central bank to curb inflation with further interest rate hikes. For ECB department head Assenmacher, the most important lesson from the 1970s is that you have to react “quickly” because otherwise the problems would only get worse. After the long phase of zero interest rates, the ECB raised the key interest rate to 1.25 percent in September, and further rate hikes are to follow.
In 1972 and 1973, the Bundesbank raised the key interest rate from four percent to 13 percent in order to get inflation under control. Financial expert Wieland’s clear verdict: “The ECB has not learned the right lessons from history.”
Stable labor market today
From his own experience, entrepreneur Christoph Kollbach can compare the historical price explosion with the current one. As a young man, he had more surfing than existential fears on his mind. In the meantime, as head of SK Laser in Wiesbaden, he has much more responsibility and a different perspective. “Today I plan more and am more careful,” says the founder of the family business. “We know that many are left behind.”
Together with his daughter Dina Reit, he steers the company through turbulent times. Material shortages and price increases are currently the dominant issues. However, the junior boss does not want to lose her optimism and would even like to hire new people. “Due to demographic change and the ubiquitous shortage of skilled workers, this is not so easy,” says Reit.
This is where the biggest difference to the crisis at that time lies: at the time, the unemployment rate quadrupled within just two years. In contrast, the German Council of Experts expects the labor market to remain stable in the coming years.
Beginning of a wage-price spiral?
However, if there is ever less labor available, high wage increases are much easier to achieve. So whether the dreaded wage-price spiral will get going is something that the ECB representative and economic experts judge very differently.
Wieland expects companies to add significant wage increases to prices. This will further fuel inflation. ECB department head Assenmacher counters: There are currently higher wage agreements. “But they are not yet at a level that would lead to a sustained increase in inflation above the 2 percent level.”