Ifo expert: This is how this inflation works – and this is how it will continue

Created: 2022-06-08 10:03 am

There is less and less for the money because of inflation: A man packs the groceries he has bought in his bag.

© Annette Riedl/dpa/symbol image

Inflation has made goods and services in Germany more expensive than they have been in years.

Ifo economics chief Timo Wollmershäuser explains how it came about.

Munich – The Ifo Institute expects inflation to fall slightly in the second half of the year – from currently more than seven percent to less than six percent.

While this is encouraging, inflation remains a specter, especially for lower-income households.

Because food is increasingly affected.

The current inflation has an unusual genesis, as Ifo economic chief Timo Wollmershäuser explains.

The trigger was not an economic boom.

On the contrary, bottlenecks on the supply side would have driven up production costs and at the same time throttled production.

It all started with Corona, the biggest economic downturn in post-war history.

Because of the lockdowns, there was no money to spend on leisure, culture and many services.

As a replacement, the demand for IT products and durable consumer goods such as furniture or cars has increased worldwide.

"Many manufacturers were reaching their capacity limits in production because important preliminary products such as microchips were not available in the required quantities so quickly," says Wollmershäuser.

Inflation in Germany: The Ukraine war has exacerbated the situation

The escalating Ukraine conflict has exacerbated the situation.

Energy and food prices have exploded, some raw materials and intermediate products were no longer available.

"In March, for example, car production in Germany came to a standstill because there were no wiring harnesses from the Ukraine," says Wollmershäuser.

"And because of the sanctions, there is a lack of wood from Russia, one of the most important wood exporters in the world," emphasizes the analyst from the Munich ifo Institute.

In addition, China again adopted a zero-Covid strategy in the spring.

Whole cities have been cordoned off, production has come to a standstill, shiploads of urgently needed parts are stuck in Shanghai.

"After all, Germany gets about 15 percent of its imported primary products from China." The production problems are likely to weigh on the economy well into the year.

Inflation is now felt in almost everything we consume on a daily basis.

While high earners can offset part of the price increase with savings, low-income households have to limit their consumption.

In addition, poorer households are burdened by the fact that inflation feeds through to food – and they spend more of their money on it than richer households.

Inflation in Germany: There is no relief in sight in the short term

There is no relief in sight in the short term, because the majority of companies in consumer-related areas such as retail want to raise prices further, says Wollmershäuser.

That was the result of an Ifo survey.

There is a certain relief in energy prices and in the upstream industry.

"Although prices are still high there, they are no longer rising and that should then gradually moderate inflation in the second half of the year."

The situation is difficult overall, says Wollmershäuser.

"We can't magic away the war or the lockdown in China." And he points out another danger: High earners would have saved far more than usual during the pandemic. The additional savings would be 200 billion euros.

Wollmershäuser: "We have no idea what people will do with the money, because there has never been anything like it." If this money were to be spent, there would be strong demand on top of the scarce supply.

That would fuel inflation further.

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Inflation: An antidote would be rising interest rates to encourage savings

An antidote would be rising interest rates to create savings incentives and make loans more expensive.

That slows down the economy and thus inflation.

However, unemployment and short-time work would rise and incomes would fall.

Unions are also a factor.

If the loss of purchasing power were to be offset by sharp tariff increases, there would be a wage-price spiral and more inflation.

The Ifo economic chief calls on politicians to support low-income earners in a more targeted manner.

“Politicians are providing relief across the board.

This creates purchasing power where it is not needed and further fuels inflation.

The money only needs to reach low-income households,” he criticizes.

The federal government could finance this through debt.

Wollmershäuser remains an optimist.

China is in the process of opening up a little more.

"It will pass, things won't stay tight forever."