Consequences of inflation: when incomes are no longer secure

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EU flag: Inflation is far from abating

Photo: Frank Herrmann / Getty Images

Progress has been slow but steady for many years.

Incomes go up.

The bottom line is that citizens can afford a little more every year.

Sure, for many there were no big leaps in the past.

But over time, many employees have seen substantial increases.

Those who work full-time earn on average around a quarter more per month than in 1995, in real terms, i.e. after deducting inflation.

Citizens at the higher end of the income scale saw the largest gains.

But even the lowest-income households have been able to increase their income, especially since the introduction of the statutory minimum wage in 2015. Overall, the picture is of a relatively quiet upward trend, as the German Institute for Economic Research (DIW) has just traced in a study.

But now a new phase has begun.

A feeling is spreading in the middle of society that has not been so present for a long time: income insecurity.

Surprisingly high inflation raises the question of whether wage increases will keep pace with the rising cost of living – or whether the hard-earned gains in prosperity over the past few decades could melt away before long.

Less for more

A few figures: So far this year, disposable income in Europe and North America has already shrunk in real terms, according to the OECD, the international organization of market democracies, in its current Economic Outlook.

According to this, Germans have already suffered a loss of purchasing power of 1.3 percent in 2022.

In Italy, the real decline is 1.6 percent, in France 0.4 percent.

Americans even have to deal with an inflation-adjusted minus of 3.5 percent.

And that is just the beginning.

Inflation is far from abating.

The central banks are still introducing gentle braking manoeuvres, based on the general price trend.

The US Federal Reserve will raise interest rates again on

and the Bank of England

The pressure to act is now clear to everyone, including finally the European Central Bank (ECB), which formally announced its interest rate turnaround last week - even if it has not yet started work.

However, it will be a while before interest rates have risen to the point where they actually slow down price dynamics.

A return to the inflation standard of two percent, the target of the large western central banks, is likely to take years.

It is possible that inflation will rise even further: the current combination of escalating energy sanctions and embargoes between Russia and the West and ongoing supply bottlenecks in Covid-plagued China opens up an alarmingly price-boosting scenario.

There are serious questions that are currently being asked: Will citizens' incomes be able to keep up with inflation over the coming years?

Are large sections of the population threatened with a sensitive loss of prosperity?

In the end, does inflation even endanger democracy?

Inflation deepens social rifts

So far, the price hikes are not really painful for many in the West.

During the pandemic, they have made it a habit to save a larger proportion of their income.

Now they are reducing their savings rates again, which is currently offsetting the loss of purchasing power.

But this strategy of cushioning higher inflation rates naturally only works temporarily.

And not for poorer sections of the population anyway, because they don't have the necessary financial buffers at all - those who earn little can hardly put any money aside.

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In addition, low earners spend a larger part of their household budgets on energy and food, i.e. precisely those product groups that have seen the sharpest price increases in recent months.

If one differentiates the cost of living according to income class, it shows that the inflation rate of the poorest fifth of Germans is one and a half percentage points higher than the rate of the 20 percent with the highest income.

In Great Britain, inflation among poorer sections of the population is almost three percentage points higher than among the richer sections of the population, according to the OECD.

Inflation is unfair.

It deepens social rifts.

The risk of political upheaval is therefore acute: the increased income insecurity is a penalty for populists, and they are now trying to convert it.

The main thing is against the establishment

In the last presidential elections in France, the right-wing national Marine Le Pen, despite its closeness to the Ukraine aggressor Vladimir Putin, managed to come within a few percentage points of incumbent Emmanuel Macron - because in the final phase of the election campaign it had consistently focused on the issue of the cost of living.

(Watch

out for the second, crucial round of the National Assembly elections

In the warming-up campaign for America's congressional elections this fall, Trump's Republicans are tackling inflation.

It's a welcome opportunity to raise awareness: against the establishment, against the Joe Biden government and against the Federal Reserve - against all the state institutions that, according to the cross populist reading, have conspired against ordinary people.

The situation is also tense in Italy, where after more than two decades of extremely weak economic development, many citizens have already fallen into social decline.

The multi-party government is still being held together by Mario Draghi's authority - and by the prospect of billions of euros being transferred in full from the Corona crisis fund.

But inflation threatens to further promote the already advanced polarization of Roman politics.

Collapsing purchasing power and weak economic development form a toxic mixture - especially when they meet a social mood that already treats state institutions with deep mistrust and cynicism.

Unions in an unusual role

In Germany, the government is trying to get a handle on an issue for which the central bank is actually responsible with fuel discounts, nine-euro tickets, the threat of a special tax for inflation profiteers among corporations and all sorts of other things.

Meanwhile, the unions are warming up for a tough bargaining round.

As income insecurity increases, their role is changing.

For many years, the German trade unions have prided themselves on not only having an eye on the short-term income interests of their members, but also on macroeconomic stability.

Now, on the other hand, they must do everything they can to at least secure real wages.

Otherwise they risk their credibility.

The Bundesbank recently determined in a survey that Germans are already expecting seven percent over a twelve-month period.

If inflation rates continue to rise, that means wage agreements in the direction of ten percent.

In view of recent high company profits and a still tight labor market, the negotiating position of the employee representatives is quite promising.

The fact that the statutory minimum wage will rise to twelve euros an hour in autumn not only helps low earners, but could also shift the entire wage scale upwards.

The most important economic dates of the coming week

Expand areaMonday

Frankfurt –

– Meeting of the Science Ministers of the G7 countries (until Tuesday) chaired by Federal Minister Stark-Watzinger

ExpandareaTuesday

Lübeck -

- German Farmers' Day (until Wednesday) with Federal Minister of Agriculture Özdemir.

In times of extremely tight global food markets and hunger warnings, especially for Africa, the agricultural sector is no longer just about sustainability, i.e. quality, but also about efficiency, i.e. sheer quantity.

ExpandareaWednesday

Washington -

- The US Federal Reserve decides on the further course of monetary policy.

General expectation: 0.5 percentage points plus for the key interest rate.

Brussels –

– NATO defense ministers meeting and Ukraine Contact Group deliberations (until Thursday).

Russia's advance in Donbas war of attrition puts pressure on West: more weapons?

By whom?

(Even from Germany?) How?

Kiel/Munich –

– It doesn't get any brighter: The Institute for the World Economy and the Ifo Institute each present new economic forecasts.

Expand areaThursday

Luxembourg -

- The statistical authority Eurostat publishes key figures on the European labor cost index.

ExpandareaFriday

Luxembourg -

- Eurostat to provide details on price developments in May.

ExpandareaSaturday

Paris –

– Second round of the National Council elections in France.

The parliament that will be elected will be the one that recently re-elected President Macron will work with in his second term.

Whoever has the majority is the prime minister.

Left-wing populist Mélenchon thinks he has a chance of leading the next government for the newly united left-wing list.

However, stronger rising wages will continue to drive price dynamics.

Social policy will hardly be able to avoid adjusting pensions, basic security and other transfers more quickly than was the case in the past.

Inflation threatens to become a sure-fire success – a tom-and-jerry race that ultimately no one wins and that experience has shown can only be ended at the cost of enormous social and economic damage.

The Federal Republic is already one of the euro zone countries with relatively high rates of price increases.

Most recently, the German value was almost three percentage points above the French.

At the moment, this can easily be explained by Germany's greater dependence on gas imports, the prices of which are going through the roof.

However, if higher inflation takes hold of the federal system as a whole, Germany could become an exporter of price

in the eurozone - an unfamiliar role for a nation that likes to see itself as the stability champion.