Rising inflation is causing more and more problems for companies and private households.
But the development is distorted by special factors.
The actual risk of inflation lies elsewhere, warns Commerzbank chief economist Dr.
Jörg Krämer in the guest article.
Everyone complains about rising energy and material costs.
In fact, inflation could soar to five percent in November.
In the coming year, however, it is likely to fall again - also because the renewed increase in value-added tax when calculating the inflation rate is no longer compared to the previous year.
However, one should not overlook the actual risks of inflation through these ups and downs in the rate of inflation.
These lie in a combination of quite high budget deficits and large-scale purchases of government bonds by the European Central Bank (ECB).
The corona crisis is an existential experience for many people and has changed their attitude towards the community.
They are now accepting a bigger state and higher budget deficits.
It was not without reason that there was no outcry in Germany when Angela Merkel agreed to jointly take on debt as part of the EU reconstruction fund.
In this political climate, many countries in the euro area will have significantly higher budget deficits in the coming years than was expected before the pandemic.
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Growing amount of money
High budget deficits alone do not create inflation. When states borrow money from private investors, bank balances only migrate from the investors to the finance ministers without increasing the money supply as a whole. The situation is different if the ECB purchases government bonds on a large scale in parallel to high budget deficits. If it makes these purchases through the banks as middlemen, as usual, it encourages the financial institutions to buy new government bonds from the finance ministers. Banks only buy so many government bonds because they can pass them on to the ECB.
But this creates new money.
In order to pay for the government bonds, the banks credit the finance ministers with a corresponding amount in their accounts.
The states spend the fresh money and put it into circulation.
The amount of money in the hands of citizens and companies is increasing - there is too much money and thus an inflation potential.
State hunger for credit
Too much money should continue to circulate in the coming years because the governments' hunger for credit will remain as high as the willingness of the ECB to at least partially satisfy it through bond purchases.
It is less clear when this excess of money will result in permanently higher inflation.
A look back to the USA in the 1960s will help here.
At that time, the US Federal Reserve also let the money supply increase too much.
But inflation didn't pick up until the mid-1960s, after the US economy ran hot due to rising government spending in the wake of the Vietnam War and the expansion of the welfare state.
The unemployment rate fell below five percent and labor costs began to rise faster.
European Central Bank is spurring house prices
In today's euro area, however, the unemployment rate is not yet low. So it should be a few more years before a real inflation problem looms. However, that does not mean that the ECB can lean back and relax: Firstly, its loose monetary policy has been boosting property prices for years - not only in Germany, by the way, but also in many countries in the euro area. This makes living space increasingly unaffordable for young families, for example. In addition, there is an increased risk that in a few years' time there will be real estate bubbles, the bursting of which can seriously damage entire economies.
Second, the ECB must take countermeasures early on in order to prevent future consumer price inflation.
Once it has started, it is difficult to stop it.
The captain of a supertanker has to throw the rudder early if he sees an obstacle on the horizon.
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ECB needs a plan to exit loose monetary policy
It is time for the ECB to at least devise a plan to exit the very loose monetary policy.
This involves a gradual cessation of bond purchases and then a normalization of key interest rates.
Such an exit plan allows finance ministers, companies and citizens to prepare for the necessary changes and thus avoid turbulence in the financial markets.
About the author: Dr. Jörg Krämer is chief economist at Commerzbank in Frankfurt.