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One-off effect:
ECB President
Christine Lagarde
wants to "see through" temporarily higher inflation figures
Photo: Olivier Matthys / POOL / EPA-EFE / Shutterstock
For
Christine Lagarde
(65) it is now time to "look through".
This is how she will deal with "short-term price fluctuations", the President of the European Central Bank announced to the "Economist" in mid-February.
Full focus on helping Europe's economy to get out of the Corona crisis.
"It will be a long time before the ECB has to worry about reflation."
But the current data on inflation complicates this message.
The picture has suddenly turned, according to Eurostat figures published this Tuesday.
Consumer prices, which continued to decline throughout the second half of 2020, rose in January in the euro zone at an annual rate of 0.9 percent.
The turnaround was particularly clear in Germany: from minus 0.7 to plus 1.6 percent.
That is already quite close to the target of the ECB, which would see its mandate of price stability with medium-term inflation of almost 2 percent as fulfilled.
Bundesbank
President Jens Weidmann
(52) predicts an inflation rate of over 3 percent for the end of the year - he too sees this as "only temporary", so not necessarily a reason to take countermeasures.
Weidmann's predecessor in office,
Axel Weber
(63), today President of the major Swiss bank UBS, warns against a "comeback of inflation".
All those who thought they would not have to reckon with excessive inflation in the foreseeable future are threatened with "a rude awakening".
There is a sense of satisfaction here after Weber and others were wrong for more than a decade in warning of inflation as a result of loose monetary policy.
However, a large part of the capital market is currently preparing to convert investments into an inflation-proof manner.
"The inflation monster is back," writes ING economist Carsten Brzeski.
Does the relationship between weak economy and weak price dynamics no longer apply?
Or what is going on there?
The German VAT
An explanation for the rapid turnaround at the turn of the year was quickly found: The temporary reduction in German VAT, which had previously caused prices to fall from July to December, expired.
Apparently the dealers had actually passed a large part of the tax rebate through to their customers, and now things are going in the opposite direction.
Christine Lagarde also referred to this effect, as did the CO2 tax introduced on January 1st.
In addition, in countries such as France and Italy, the retail discount season has been postponed from the pre-Christmas business to January so that the stationary stores that have reopened there also benefit.
ING expert Brzeski also sees "a number of one-off effects" at work.
So the inflation monster doesn't scare him at all.
Because there are more of these one-off effects.
The base effect
Axel Weber's UBS justifies its inflation forecast of 3 percent in the USA and 2 percent in the euro area for 2021 mainly with the previous year.
This can almost only point upwards, especially in spring, after all, the comparison value is the economic collapse in the first corona lockdown from March 2020, when the prices for all kinds of goods collapsed with demand.
Only when inflation rates rose well above this level would Weber also see this as a sign of inflationary pressure.
Expensive raw materials
The price index is particularly strongly affected by energy costs, which recently fell year-on-year, but much more slowly than in previous months.
Since oil even had a negative price for a short time in April 2020, but now costs more than $ 65 per barrel, a noticeable rise in inflation statistics can be expected in the spring.
In general, raw materials on the world market from rare earths to plastic granules are currently becoming more expensive because the economy is not paralyzed globally and synchronously.
High demand from some countries and some sectors (for example the Chinese industry) meets a shortage of supply.
Central bankers try not to be guided by raw material prices when controlling inflation, because these fluctuate greatly, say little about the price dynamics in the respective national economy and can hardly be influenced by interest rate policy anyway.
But the core inflation rate excluding energy and food prices was 1.4 percent in January in the euro zone, even higher than the overall index.
This indicator should get more attention in the coming months.
Bottlenecks in trade
The disruption of global supply chains due to this uneven economy could also drive prices up.
One example is the supply crisis with microchips, which is likely to paralyze car production until the middle of the year.
Lack of goods leads to rising prices.
The higher freight rates due to the shortage of containers have an even broader effect because they make all imported goods more expensive.
So far, this effect has mainly hit producers.
According to the Federal Statistical Office, producer prices for intermediate goods rose by 2.4 percent in January, including secondary raw materials by more than a third.
The question now is whether companies see themselves in a position to pass this inflation on to their customers - and whether they can afford not to.
Otherwise, the effect is likely to show up later in consumer prices despite weak end demand, the classic case for the rather exotic phenomenon of stagflation: the economy is paralyzed, but prices still rise, as in the oil crisis of the 1970s.
Travel lose weight
Interpretation of inflation data is also complicated by the fact that different things are measured over time.
The statisticians always adjust the shopping basket at the beginning of the year to determine how much weight the prices of individual goods and services are given when calculating the price index.
In doing so, they respond to changes in actual consumer behavior.
The pandemic effect is now only being added to the shopping cart with a delay, especially the prices for travel and tourism now play a lesser role.
According to the Bundesbank's estimate, the German inflation rate would have remained below 1 percent in January using the old method.
This effect alone has inflated the January value by more than half.
Prospect of the catching-up boom
From summer, however, the changed shopping basket could have the opposite effect: if flights and hotels are in demand again and therefore more expensive, but no longer count as strongly in the inflation data because of their reduced weight.
Nonetheless, the Bundesbank expects the price level to rise significantly more sharply in the second half of the year than it is now, driven by a boom in catching up consumption for everything that is not possible today: dining out, sporting events, office-based services, offline shopping - all provided, of course, that the corona crisis will be under control by then.
Boost from the state
All of that would still be within the scope of the one-off effects.
But what if the government and central banks provide more aid than necessary and the economy overheats?
So far this has only been a theoretical discussion, but it is being passionately discussed among US economists in view of the now realistic plan for corona aid of 1.9 trillion dollars pursued by President Joe Biden.
Ex-Treasury Secretary Larry Summers (66) is in favor of a large, debt-financed spending program;
However, this is simply too great compared to the corona damage, and that will "trigger inflationary pressure such as we have not seen in a generation".
Pressure from the bond market
Whether Summers' warning is valid depends largely on how much idle capacity the economy has left.
Estimates vary widely.
For Europe, whose economy has been hit much harder by Corona than America's and only a fraction of additional government spending is in sight, overheating is not an issue anyway.
The capital market is also pricing in rising inflation in the coming years, which is causing the recently extremely low financing costs for companies to rise.
In this detour, the fear of inflation could even give the ECB reason to increase its bond purchases again.
Wage-price spiral
The same applies to wages: if they don't keep up with prices, there is a risk of a loss of purchasing power - and that would jeopardize the upswing, so it would rather bring an even looser monetary policy into play.
But if inflation leads to significantly higher wages, sustainable inflation dynamics could actually arise.
In the past few decades, on the other hand, digitization and globalization, with their cost reductions, have acted as strong weights.
Meanwhile, some economists see arguments that these forces could be undermined.
But even then there would be a simple solution.
If inflation was "really an issue, interest rates would rise sooner and faster than people expected," said Mark Zandi, chief economist at Moody's.
That would be an easier task for central banks than the now long futile effort to bring inflation close to its target value.
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