Inflation: The value in Germany was very low for a long time, but the rate of inflation is gradually increasing significantly.
Reason to worry?
Questions to Carsten Mumm, chief economist at the private bank Donner & Reuschel.
The rate of inflation in the euro area has set at over two percent. In Germany it was recently as much as 3.8 percent. What's next?
We expect sustained high inflation rates in the coming months.
In Germany we may exceed the four percent, in the euro area it could approach three percent.
What are the reasons?
There are several.
On the one hand temporary reasons, on the other hand some that have a longer-term effect.
What are the temporary factors?
In Germany, this is primarily the renewed increase in VAT, which was lowered in July 2020 as part of the Corona measures.
That alone caused inflation to jump by one to one and a half percent in July.
This technical effect will be with us until the end of the year.
Another temporary effect is the introduction of the CO2 tax.
In addition, there is the so-called energy price base effect, which arises from the fact that the price of crude oil, also due to Corona, was at a record low in the previous year.
This led to a surge in prices, especially this spring.
Chief Economist Carsten Mumm: "I don't think we can get back the low level of inflation from before the Corona crisis"
And the sustainable factors?
The Corona crisis made it clear to the economy what problems can arise from just-in-time production. If only a small component is missing because supply chains collapse, an entire production facility may have to be shut down. For this reason, supply chains are currently being restructured, companies no longer rely on just one supplier, but are looking for several in different regions, possibly even in Europe. This is of course more expensive than having just one Chinese supplier. Another long-term factor is climate protection. In order to reduce their CO2 emissions and meet environmental protection requirements, for example, companies have to make investments. We currently have massive delivery problems with various raw materials and inputs,also extreme bottlenecks in transport capacities. These are also effects that could well last. As a result of the climate change, we need a number of very specific raw materials, for example for battery production or for solar cells. Prices will remain high in these areas. On the political side, there is also a concern in many places, even in the USA, that wages for middle and lower incomes must rise more sharply than in the past ten years. From an economic point of view, this is not wrong, because it increases consumption. But it also increases inflationary pressures.Prices will remain high in these areas. On the political side, there is also a concern in many places, even in the USA, that wages for middle and lower incomes must rise more sharply than in the past ten years. From an economic point of view, this is not wrong, because it increases consumption. But it also increases inflationary pressures.Prices will remain high in these areas. On the political side, there is also a concern in many places, even in the USA, that wages for middle and lower incomes must rise more sharply than in the past ten years. From an economic point of view, this is not wrong, because it increases consumption. But it also increases inflationary pressures.
Everything weighed against each other, your conclusion?
I don't think we can get the low inflation level back from before the Corona crisis.
There is also the subject of geopolitics, which is currently being pushed into the background.
Nothing at all has changed in the relationship between China and the USA under the Biden government.
The trade conflict remains and with it trade barriers and tariffs, which also have a lasting effect on prices.
The European Central Bank's inflation target of two percent is currently being clearly exceeded. Will the central bank do something soon?
I do not believe that.
At least in Europe, that will take a long time.
The current 2.2 percent in the euro zone does not yet represent any real inflationary pressure and the ECB assumes that the price-driving factors are temporary.
That's why she stays very relaxed.
The key benchmarks for the ECB are its own inflation projections, i.e. expectations.
And that is an inflation rate of 1.4 percent in 2023 - far from the target.
As long as that is the case, the ECB will remain expansionary.
This means that in the coming year or two there is no end to the ultra-loose monetary policy in sight, and certainly not a turnaround in interest rates.
If the interest rate turnaround came, what would be the consequences for highly indebted euro countries like Italy?
Serious.
And of course the ECB knows that.
It also knows how sensitively the markets react to any indication of a possible expiry of the expansionary monetary policy.
Knowledge of the close interdependence of monetary policy and fiscal policy can therefore also be added to the long-term inflation-driving factors.
If the ECB buys fewer securities and government bonds, that would push interest rates higher.
Mumm: "Of course, the ECB wants to avoid countries coming to the brink of bankruptcy again."
Could a turnaround in interest rates trigger the next euro crisis?
Yes, definitely, especially since the national debt has grown even further as a result of the Corona crisis.
Of course, the ECB wants to avoid countries coming to the brink of bankruptcy again.
Problems could also arise on the stock and real estate markets in the event of a rapid turnaround in interest rates.
Yes absolutely.
All asset classes are affected by years of zero and negative interest rates.
A turnaround in interest rates must therefore take place very, very slowly - and with very careful and very early announcement.
The normal citizen feels in a bind. On the one hand he feels the real price increase in the supermarket or at gas stations, on the other hand he does not get any interest for his investment and so far there has not been any higher wages. What can comfort him in this constellation?
There is only one strategy.
You have to convert your capital investment, especially if it is intended for long-term provision for old age.
Interest-bearing investments are real, i.e. after deducting inflation, with negative interest almost across the board.
Instead, you have to rely on real assets such as stocks and real estate.
The prices have also risen there, but only in these areas is there any possibility of preserving one's real capital.
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When shopping in the supermarket or at the petrol station, consumers are now clearly feeling the price increase.
It is not only the rise in value added tax that is to blame, but also long-term factors.
© Photo: Oliver Berg / dpa
Aren't there any signs of a bubble in the stock market?
Of course, share prices are fueled by the low interest rates.
If interest rates rise significantly, there are investment alternatives again and one would have to question the share prices.
But: The prices are not only interest-driven.
They are also rising because we are currently experiencing an unusual economic upswing and because the majority of companies surprise with good balance sheets.
The industry is booming, consumption has picked up again and companies are able to pass the rising production costs on to the end user.
Which brings us back to the subject of inflation.
Can we already tick off the corona crisis economically?
The acute phase is over.
But we cannot put the subject aside yet.
We are currently seeing increasing case numbers again everywhere.
There will be no extreme economic slump like last year, but there may be further corona loads, especially in the winter half of the year.
Society and a whole generation of central banks are no longer used to inflation. Is the rate, which is now rising again, also a psychological problem?
Partly sure.
Inflation sensitivity is a very personal thing.
A study recently revealed that.
How you feel about it depends on your own experiences.
Personally, I have only consciously experienced periods of very low and falling inflation rates.
But of course my generation also knows the cautionary examples from history, such as the times of hyperinflation between the world wars.
Mumm: "From a purely economic point of view, you can live very well with slightly higher inflation figures, provided that the growth is right"
Is inflation overvalued?
From a purely economic point of view, one can live very well with slightly higher inflation figures, provided that the growth is right.
High inflation also means that demand is high, the order books are full and companies are able to get higher prices.
Usually this goes hand in hand with rising wages, which increases consumption and tax revenues.
Moderate inflation is not a bad thing.
For that reason, the ECB's inflation target is two percent and not zero.
However, there is a risk that the inflation rate could rise above a healthy level in the coming years and that interest rates would then have to be increased abruptly.
Interview: Corinna Maier