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There are three reasons for inflation: accidentally, weakly, or on purpose.
Sometimes these factors are linked.
The question is where we are now.
Here's the situation: inflation rates are rising.
In Germany, consumer prices have recently increased at an annual rate of 3.8 percent.
The trend is rising (there will be new numbers on
Monday
).
The Bundesbank expects rates of four to five percent by the end of the year.
In the eurozone as a whole, the price indices are also rising sharply (new figures on
Tuesday
).
In the USA, inflation rates are already over five percent.
The Federal Reserve (Fed) is preparing for a change of course, rather late.
South Korea's central bank already raised interest rates last week.
Similar steps are not yet in sight in the eurozone.
In many affluent countries something is currently happening that has not happened for a long time: the price increases are above the two percent norm, which is considered a desirable target.
Accidentally inflation
So far we have been dealing with accidental inflation.
The measured price increases result in part from a statistical effect, since last year many goods were extremely cheap due to the corona crisis and VAT was temporarily lowered in Germany.
The comparison with the previous year therefore exaggerates the actual price dynamics.
These effects are likely to expire in the coming months.
But the momentum of the upswing after the Corona recession was much stronger than expected.
Many companies have also misjudged themselves.
Accordingly, there are production and personnel bottlenecks.
That hinders production and drives up prices.
Central banks play a key role in accidentally inflation.
They too can be wrong, and quite dramatically.
Like in the 1970s, when the Fed tried to pursue a forward-looking monetary policy, but systematically misjudged the state of the US economy - and in the end produced double-digit types of inflation.
Inflation from weakness
The example of the 1970s and 1980s also shows how easily an accidentally excessive inflation can become inflation out of weakness. At that time, currency devaluation rates of up to 20 percent occurred at times in many Western countries. The rise in prices, which was triggered by the oil crises in 1973 and 1980, developed a momentum of its own - because the state institutions were too weak to counter the inflationary forces.
The USA, at that time the hub of the world economy, was a nation in the seventies that was shocked by a lost war (Vietnam), by a criminally acting president (Richard Nixon), by social conflicts (the clashes over the black civil rights movement and student unrest) , of political murder (of the Kennedys and Martin Luther King). The institutions' credibility was under attack - the social and political climate opposed a decidedly anti-inflationary monetary policy by the Fed.
In Great Britain too, inflation ran away at that time. The country was at times considered ungovernable, shaken by partly militant workers' protests, by religiously motivated terror in Northern Ireland and by the phantom pain of a former world power that had finally lost its colonies and had now shrunk to the format of a European middle power. The situation was similar in other western countries: They were unsettled nations that proved unable to curb the inflationary surge caused by rising oil prices.
At that time Germany was one of the few Western countries that were only marginally affected by the development.
In this country too, inflation rates rose to more than seven percent at times.
But Germany decided not to take part in the "Great Inflation", as a study with the participation of Otmar Issing, formerly chief economist of the European Central Bank (ECB), put it.
In particular, because the Bundesbank's independence remained intact and it countered with a tight monetary policy stance.
Troubled times
Historical comparisons with the present are obvious. Even today, many societies are insecure and polarized. There are plenty of reasons: the hasty and bloody withdrawal from Afghanistan reveals the weakness of the West and its leading power, the USA. It's only been a few months since Donald Trump called for a storm on the White House and hordes of his supporters were willingly incited. The Black Lives Matter movement erupted in violent public disputes - in racist tensions that seemed long gone.
Now Joe Biden and the Democrats rule with wafer-thin majorities. In just over a year there will be parliamentary elections again, in which Trumpism could triumph again. Biden's uncompromising spending programs can be interpreted as an attempt to pacify a deeply divided nation - so that a bubbling upswing will noticeably reach a large majority of citizens. The risks and side effects of this course, including rising inflation rates, are not considered to be the most pressing problem in a country that has barely missed drifting into national chauvinism.
Accordingly, the US Federal Reserve has meanwhile primarily concerned itself with other things than price stability. Months ago, Chairman Jerome Powell gave speeches on income inequality and equity, particularly with regard to black workers. (Watch out
for new numbers from the US labor market
on
Friday
.) Inflation has not been a big issue for the Fed for a long time - which is currently changing rapidly in the face of high inflation rates.
It cannot be said that Europe is in a much better position.
In the EU too, democracies have become shaky;
Populism is rampant;
many countries are run by minority governments.
In Poland and Hungary, democracy, the rule of law and freedom of the press are threatened, but the EU has so far not found any means to enforce common values across the board.
It is similar to the USA: what all sides can reliably agree on is spending money on credit.
The Corona development fund, for example, lags behind the urgently needed reorganization of EU finances - it is just a 750 billion euro check.
The fact that the ECB continues to buy large amounts of government bonds helps with the financing.
A long-term sustainable policy would look different.
Inflation on purpose
The crucial question is: Are the institutions strong enough today to be able to curb inflationary momentum of their own? Because it won't be so easy: If inflation rates continue to rise, the central banks should quickly cut back bond purchases and raise interest rates. However, with such a maneuver, heavily indebted states and companies were in dire straits.
Once an inflationary dynamic has solidified, it can drift into deliberate inflation - galloping monetary devaluation that is allowed to run in order to reduce the horrendous debt. It would be an extremely ugly scenario reminiscent of the hyperinflation of the early 1920s. At that time, some of the loser countries of the First World War, including Germany, tried to service their debts with a money printing machine - the result was a collapse of the monetary order. Argentina, Venezuela and Zimbabwe offer more up-to-date illustrative material.
So far we are far from that.
And yet: unlike in the 1970s, debt levels are extremely high after a long period of low interest rates.
It may seem correspondingly attractive to let inflation run.
Which would be tragic.
Early countermeasures on the part of the central banks would limit the risks.
Record profits thanks to rising prices
We are still dealing with accidental inflation.
But it is now drawing wider circles.
German producer prices for commercial products rose at an annual rate of 10.4 percent in July.
The Federal Statistical Office has calculated that this was the highest increase in companies' purchase prices since 1975.
It was the time when Great Inflation took off.
Distribution conflicts are already on the horizon. The new price scope brings large companies ample profits. In the first half of 2021, the DAX companies made surpluses that were 87 percent above the comparison period in 2019 (i.e. before the pre-Corona crisis), as the consulting firm EY has determined. Some firms evidently benefited from an "extremely favorable price environment".
In turn, high profits with rising inflation represent a constellation in which the unions can hardly help but demand a hefty wage increase.
Maintaining the purchasing power of employees is once again a priority in terms of collective bargaining policy.
The result of this dynamic could be a spiral in which price and wage increases build up each other.
In the past decades this mechanism hardly existed, because globalization and favorable demographics had a dampening effect.
Now the conditions are returning under which a wage-price spiral can arise: protectionism, a scarcer potential of workers and a lot of liquidity.
As the experience of the 1970s and 1980s shows, it is difficult to slow down the spiral once it has got going.
The most important business dates of the week ahead
Open assembly area
Wiesbaden -
German Inflation
- The Federal Statistical Office presents an initial estimate for the increase in consumer prices in August.
Expand Tuesday area
Nuremberg -
German Jobs
- The Federal Employment Agency sets new labor market figures.
Luxembourg -
European inflation
- Eurostat's EU statisticians publish a first estimate of inflation in the euro area in August.
Beijing -
Chinese Mood
- The People's Republic Statistics Bureau publishes the new index on the mood among purchasing managers in the country.
Berlin -
German election campaign
- Business day of the CDU economic council at the beginning of the hot election campaign phase.
Austria's Chancellor Sebastian Kurz was invited as a guest.
Expand Wednesday area
Luxembourg -
European jobs
- Eurostat statistics agency publishes new indicators on unemployment and employment.
Expand Thursday area
Frankfurt am Main -
German economy
- The mechanical engineering association VDMA reports on incoming orders in July.
Open area Friday
Washington -
US Economy
- The US government releases new unemployment and employment figures in August.
Frankfurt am Main -
New Dax
- Deutsche Börse is expanding the leading index from 30 to 40 values and is saying who will be represented in the expanded Dax in the future.