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Inflation: the benefits of rising prices for the economy

2021-03-08T06:25:49.254Z


Rising inflation rates are ringing alarm bells on the financial markets and among consumers. But why actually? Price increases have many advantages in an upswing - as long as they don't get out of hand.


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Numbers, please:

Many people fear rising prices, but they certainly have an economic benefit

Photo: Eric Gaillard / REUTERS

The dreaded I-word haunts the world again: inflation.

The latest statistics already showed a slight increase in the general price level in Germany.

And the capital market is sending warning signs that this could only be the beginning: The interest rates on many bonds - such as German, US and British government bonds - have risen recently.

Investors apparently fear that the expected economic recovery after the Corona crisis will be accompanied by a further rise in inflation rates, which should also lead to higher interest rates.

The background to this are economic stimulus packages worth billions around the world.

The US, for example, is currently launching a gigantic aid package worth $ 1.9 trillion to get its economy going again.

On a smaller scale, such state aid can also be found in many other countries.

And a look at the economics textbook shows that if the economy recovers and the amount of money in circulation increases at the same time, inflation may not be far.

Many people associate a rise in inflation with negative expectations: goods and services are becoming more expensive, consumers can afford less, in the worst case the price spiral gets out of control and then galloping or hyper-inflation threatens.

Greetings from Weimar: In order to master the national debt and to be able to meet the obligations from the First World War, the printing press was started in Germany in 1923 as a result of the economic crisis.

The result: inflation exploded.

Of course, such an extreme scenario does not have to occur - on the contrary: it is the exception, and politicians and, above all, the central banks have some instruments at their disposal to keep inflation under control.

A tried and tested means is generally to increase interest rates, which curbs additional borrowing and at the same time creates an alternative to consumption with saving.

Moderate inflation is definitely desired

However, moderate inflation in the context of an economic upswing is also considered to be quite desirable from the point of view of the interest rate watchdog.

After all, it is no coincidence that the European Central Bank's (ECB) inflation target is 2 percent and not around 0 percent.

Because price increases within this manageable framework have advantages.

For example, moderate inflation helps the prices of various goods to adjust to one another to the required extent during an upswing: some prices rise faster, others more slowly.

This is a sensitive issue, especially within the euro zone, because the ailing countries in the south have in some cases already lost their price competitiveness.

They would help if prices rose faster in strong economies - especially in Germany.

Even the Bundesbank has therefore been advocating stronger wage agreements in this country for a long time.

In addition, inflation that is tolerated in moderation can act as an additional motor for the upswing.

Companies that can enforce higher prices gain leeway for investments that improve productivity.

Since wages usually only rise with a delay, employment can increase.

In the Keynesian 1970s, the rule of thumb was derived from this that there was a choice between inflation and employment.

The statement of the future Chancellor

Helmut Schmidt

, who announced that he would prefer “5 percent inflation to 5 percent unemployment”, became

legendary

.

Good for debtors, bad for creditors

Inflation also has a particular impact on the banking industry.

In principle, the following applies: Higher rate of price increases, which are not yet taken into account in the interest, help debtors and disadvantaged creditors.

This is because a nominally fixed loan amount miraculously shrinks in real terms as the money value falls over time.

If incomes rise in an inflationary environment, not only those who have recently taken out a loan to buy a house or apartment can be happy, ideally with fixed interest rates as long as possible.

The state, as a notorious large debtor, is also one of the profiteers (at this point, too, it is worth looking back at the extreme case in the Weimar Republic, when the German war debts were practically completely eliminated through hyper-inflation).

If inflation rates rise, interest rates also usually rise.

Savers do not have to benefit from this, because in the end the real money value is decisive for them, and this does not necessarily increase - at least in theory - in the inflationary environment due to the interest rate.

However, the statistically measured inflation rate is only one thing, the other is the rise in prices that everyone experiences personally.

This depends, for example, on their consumer behavior and is ultimately different for everyone.

From this it follows: Those who spend little money, and above all for things whose prices do not rise so strongly, and at the same time put a lot of money on the high edge with good interest, can profit financially in this scenario (apart from that there are also for investors inflation-protected bonds, with which savings can be saved from inflation).

One industry that definitely benefits from higher interest rates is life insurers.

In the past, you sold policies with nominal interest promises and are therefore increasingly in distress given the years of low market interest rates.

An increase in interest rates would free the insurance industry from this emergency.

Finally, those who fear inflation should not forget the fatal consequences the opposite of it can have: deflation.

Falling prices are considered extremely dangerous by economists because they can set in motion a cycle of reluctance to consume, falling company sales and falling wages, which can be difficult to stop.

In the end, debtors are also crushed by their obligations, there are bankruptcies and further falling prices - this was also evident in the global economic crisis at the beginning of the last century.

Price increases of around 2 percent are the significantly lesser evil.

cr, cs

Source: spiegel

All news articles on 2021-03-08

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