Overpressure on the price valves - today and the day after tomorrow

Created: 01/22/2022, 09:39 am

Prof. Stefan Kooths is Vice President of the Kiel Institute for the World Economy © N. Bruckmann/M.

Litzka

The head of economic activity at the Kiel Institute for the World Economy, Prof. Stefan Kooths, sees great dangers for price stability in Germany for the next few years.

It is true that the recent strong inflationary pressure is likely to ease somewhat initially.

But in the medium term, there are significantly greater risks to price stability than Corona and ruptured supply chains, warns Prof. Stefan Kooths in the guest article.

Kiel - At over five percent, the rate of inflation for consumers in Germany was recently higher than it has been since the reunification boom. Even if some base effects disappeared at the turn of the year, inflationary pressure will only ease off slowly. Because not all of the price-driving effects have yet reached the consumer level. Nevertheless, the current surges in inflation are temporary in nature because they are essentially directly or indirectly related to the pandemic. After the pandemic, however, there are new threats to price stability that cannot simply be sat out – on the contrary.

Around the world, countries with massive support programs have stabilized the economy during the corona crisis.

The money for this came from the central banks, which financed the new debts taken on by the states via the printing press.

Overall, private actors were able to generate considerable income in this way, which was not matched by any production.

Central bank course creates phantom income

Overall, these are phantom incomes.

These were initially hardly noticeable because consumers were not able to spend their money as usual during the lockdowns.

Purchasing power was therefore pent up to a considerable extent.

In Germany alone, private households are likely to have put an additional 215 billion euros on the high edge during the pandemic phase.

voice of economists

Climate change, supply bottlenecks, corona pandemic: Rarely before has interest in the economy been as great as it is now.

This applies to current news, but also to very fundamental questions: How do the billion-euro Corona * aid * and the debt brake fit together?

What can we do about the climate crisis without jeopardizing our competitiveness?

How do we secure our pension?

And how do we generate the prosperity of tomorrow?

In our new series  ,

 , Germany's leading economists are now providing guest contributions in the form of assessments, insights and study results on the most important economic issues - profound, competent and opinionated.

In the contact-intensive economic sectors, sales collapsed massively during the crisis.

Because this was not due to weak demand, but to infection control measures, prices there did not fall.

Mail order, on the other hand, boomed because demand shifted more to goods that could be ordered there – those who couldn’t travel and had to work from home at least wanted to make themselves more comfortable at home.

High demand meets limited supply

High purchasing power has fueled the buoyancy, however high demand is meeting production severely impacted by supply shortages, which are also largely a consequence of the pandemic. A lot of demand, little supply, which is reflected in sharply rising prices. As soon as the international supply chains are running more smoothly again, there are signs of easing in inflation from this side, even if it will take a while.

Can you sit back and trust that time will fix everything?

Unfortunately, no.

In the medium term, threats to price stability stem from factors that exist independently of the pandemic.

Not only are they more stubborn, but they gain increasing weight over the next few years.

The explanation for this is as follows:

In the medium and long term, price stability remains exclusively a question of monetary policy.

However, their mandate becomes more difficult in times of high debt, an aging population and ambitious decarbonization policies.

Fewer employees, falling savings

In the 2020s, demographic developments are increasingly weakening the forces of growth.

Already in the coming year we will pass the zenith in terms of the labor force in this country.

While fewer and fewer people are productively active then, the number of consumers initially remains unaffected.

As a result, savings fall and the supply of capital decreases.

This finding is not unique to Germany, but applies to large parts of the global economy.

more on the subject

The traffic light must support the reform of the EU fiscal rules

“Unreflected shift of power to Brussels”

Corona: Big question marks behind the latest 2G decisions 

Climate policy: Reorganization of production leads to reorganization of the capital stock instead of to its expansion

If it is to be successful, climate policy will also have a global impact on the capital markets. The conversion of production to lower greenhouse gas emissions requires massive investments, thus increasing the demand for capital. In addition, these investments will not increase production capacities in the foreseeable future, but "only" make them emission-free. They are reorganizing the capital stock, not building it up as is otherwise known from investments.

In the event of success, the overall economic return will not beckon in 20 years at the earliest, until then the consumption options will be reduced in the course of decarbonization.

For the foreseeable future, climate policy is therefore not a growth program, but rather strains production capacities.

Therefore, the following also applies: No matter how one judges the bypassing of the previous debt brake by the new federal government from a legal point of view, the greater scope for deficits does not fit into the overall economic landscape in terms of stabilization policy.

Higher interest rates due to demographics and decarbonization

Less supply, more demand – demographics and decarbonization are causing higher interest rates on the capital market.

If the central banks do not understand the rise in interest rates resulting from the increasing scarcity of capital in their monetary policy with regard to the high level of debt and – related – out of concern about a new financial crisis, the excessive demands on production possibilities will result in higher inflation.

This scenario describes a risk, not an inevitability.

Only if monetary policy fails to react will the inflation floodgates open.

Neither aging nor decarbonization ("greenflation") are inflation drivers in themselves - they do not change the price level, but relative prices.

Fiscal policy in duty

Without ifs and buts, price stability remains the responsibility of the central banks, from which they should not be released.

However, it would be the task of fiscal policy not to make this task unnecessarily difficult for them.

For the euro area in particular, this means fiscally solving the problem of over-indebtedness and thus liberating the ECB from fiscal dominance.

About the person: Prof. Stefan Kooths is Vice President of the Kiel Institute for the World Economy and Director of the Research Center for Business Cycles and Growth.

*Merkur.de is part of IPPEN.MEDIA.