analysis
Inflation is rising again in Germany and many European countries. It is unclear whether and when interest rate cuts will occur. For the time being, it is ruled out that the European Central Bank will affect the key interest rate.
The waves are several meters high, the storm is merciless – the huge container freighters are heading through rough waters. More and more ships are taking the approximately 5,500 kilometer detour around the Cape of Good Hope in southern Africa instead of sailing through the Suez Canal. Yemeni Houthi rebels are violently attacking shipping in the Red Sea and making the journey to the Suez Canal dangerous.
The journey around the Cape takes five to eight days longer and is increasingly driving up freight rates – also because global logistics for around 15 percent of world trade are once again being thrown into disarray. The head of the logistics group DHL, Tobias Meyer, recently warned at the World Economic Forum in Davos that there will likely be an increasing shortage of containers in Asia in the coming weeks because there is a lack of supplies due to the longer transport. Meyer knows what he is talking about, because in Corona times this development triggered massive delivery bottlenecks – and thus rising prices in the long term.
The new turbulence in world trade is just one reason why inflation is tending to pick up again. Continuing high energy costs, poor harvests and the tendency among many companies to charge higher prices than necessary – known as “greed inflation” – are driving inflation, as are higher taxes and significantly higher wages.
Inflation in many countries stubborn – or rising
According to local calculations, the inflation rate in Germany rose to 3.7 percent in December compared to the previous year, after 3.2 percent in the previous month. Inflation also rose again in the euro zone – by 0.5 percentage points to 2.9 percent. Prices rose particularly sharply in Slovakia (6.6 percent), Austria (5.7 percent) and France (4.1 percent). In Greece and Spain, where it was hoped that the situation would be under control, inflation continues to rise or remains at a high level. The situation is similar in many other countries outside the eurozone, particularly in the USA and Great Britain.
Food prices pull on again
Many observers see no real all-clear. The decline in inflation in the euro zone since its peak of 10.6 percent more than a year ago is remarkable. But now inflation seems to be at a significantly higher level than in the times before Corona. Going to the supermarket or going to the gas station remains expensive for most citizens.
There is no relief, especially when it comes to food, but prices are rising again. The costs for television sets or stand mixers may have fallen – everything will continue to become more expensive, especially when it comes to everyday goods and services. The decline in overall inflation in recent months is hardly visible to consumers.
All of this shows that the problem of inflation is not yet resolved. Inflation remains stubborn. The assessment of most market participants on the stock markets was downright naive. They saw the phase of massively rising prices as already largely over, speculated that interest rates would soon fall and thus drove share prices to new highs before Christmas.
But whether there will be any interest rate cuts in the Eurozone this year is still completely open, Robert Holzmann, Governor of the Austrian National Bank, made it clear. There is “no guarantee whatsoever” for this. His country has been suffering from particularly high prices for months, particularly because of its heavy dependence on energy supplies. “Fighting inflation is like running a marathon,” said Holzmann, who is considered a hardliner in the ECB Council. “The last few meters are the most difficult.”
Lagarde still sees no scope for interest rate cuts
ECB President Christine Lagarde appeared a little more courageous in Davos – but she sees no scope to discuss interest rate cuts before the summer. “We are on the right path towards our inflation target of two percent,” said the ECB boss. “But we haven’t achieved it yet.” And in a broadside to investors, she added: In the fight against inflation, it is “not helpful if expectations are far too high.” ECB chief economist Philip Lane sees it the same way. He doesn’t believe prices will decline at the same rate and speed this year as last year.
Against this background, it is therefore impossible for the monetary authorities to turn the interest rate screw at the first monetary policy council meeting of the new year this week. They are also likely to have great difficulty achieving the inflation target of two percent soon, which their own forecasts do not foresee anyway. In fact, the ECB is assuming three percent this year and hopes to get closer to the target next year.
Dramatic consequences for the construction industry, for example
However, there is great pressure from many sectors of the economy to ease interest rates again. The high key interest rate of 4.5 percent is partly responsible for declining investments by companies. Taking out a loan is currently really expensive. The consequences in the construction industry are dramatic: more and more projects are on the brink of cancellation, and increased financing costs have caused demand to collapse dramatically. The situation is so tense that, for the first time in a long time, the construction industry is no longer ruling out layoffs – a development that would have been considered impossible just a few years ago.
On the other hand, high inflation continues to dampen the population’s consumer behavior, especially in Germany. This is not only reflected in the disappointing Christmas business. The current willingness to shop is also very low. But since exports are also not running smoothly, the weak domestic market is hitting the German economy even harder.
ECB faces further dilemma
The ECB is therefore heading for another dilemma. Because it reacted far too late to the rise in inflation, it now has to take particularly hard and long measures – but in doing so it is increasingly strangling the economic recovery. The big question is therefore how consistent the monetary authorities will be in their rigid fight against inflation.
Many economists argue that the central bank should abandon its two percent inflation target. In view of the changing structures of the economy, increasing de-globalization, the high costs of the “green” transformation and the numerous crises in the global economy, it will no longer achieve this. There are similar discussions in other parts of the world.
So far, however, the central bankers have opposed this – the ECB knowing full well that such a plan would destroy a lot of trust among the population. When asked about the discussion, ECB Director Isabel Schnabel assured in an interview with the “Süddeutsche Zeitung”: “We have no intention whatsoever of touching our inflation target of two percent.”
This means that the ECB will once again have to perform a difficult balancing act this year: combating inflation effectively, not completely strangling the economy and securing the trust of the population – the project is a bit like squaring the circle. But perhaps luck will favor the monetary authorities and some problems will disappear again – such as the conflict in the Red Sea. Then at least the long shipping trips through the rough waters at the Cape of Good Hope would no longer be an issue.