Consequences affect consumers
Ifo Institute considers five percent inflation possible
02/25/2022 12:54 p.m
With Russia invading Ukraine, share prices are falling worldwide. The Ifo Institute is expecting a further rise in prices, which could drive inflation to a level of over five percent. In the end, consumers will probably be faced with increased bills again.
The US and the EU launched extensive punitive measures following Russia’s attack on Ukraine. Washington wants to isolate large Russian banks internationally and imposes export controls on the technology sector. The new EU sanctions against Russia affect the energy, financial and transport sectors, for example. There should also be export controls.
Around the world, stocks tumbled in the wake of the invasion, while tighter supply is expected for commodities, which will push up prices and could fuel inflation further. Concerned consumers, savers and investors are asking: “What will happen to my money?”
What are the consequences of rising commodity prices for consumers?
Inflation in Germany and the euro zone has been fueled for some time by significantly higher energy prices as part of the global economic recovery. Commodity prices continued to rise after the Russian invasion of Ukraine. Ultimately, these usually end up with consumers because producers pass on higher purchase prices in whole or in part.
“The inflation rate will probably continue to rise, at least in the short term, above all because of a further increase in energy bills for consumers,” said DZ Bank chief economist Michael Holstein. “This weakens their purchasing power and tends to reduce the demand from households for other goods and also increases costs for companies.” Ifo economic expert Timo Wollmershäuser predicted: “A five before the decimal point of the inflation rate in 2022 as a whole is more likely than a three.”
In response to rising energy prices, the governing coalition decided on a relief package. From July onwards, citizens should no longer pay the green electricity surcharge. A higher flat rate of 38 cents is planned for commuters from the 21st kilometer retrospectively to the beginning of the year. Whether the measures are sufficient is controversial.
What does the development of inflation mean for savings?
Rising inflation rates are bitter for savers. According to calculations by the Comdirect, which belongs to Commerzbank, savers in Germany lost a total of 80 billion euros last year because of low-interest deposits. In the fourth quarter of 2021 alone, the real interest rate – i.e. the interest rate for savings deposits after deducting the inflation rate – was at a record low of minus 4.93 percent.
In the search for alternatives with better interest, investors should not be blinded by the extraordinarily high profit promises. The financial supervisory authority Bafin warns that fraud is often behind it: “There is no such thing as “safe, quick money”. Investments in crypto assets such as Bitcoin, Ether and Co. are highly speculative and just as risky. The Federal Financial Supervisory Authority (Bafin) warns that the money invested may be lost altogether.
How will the European Central Bank react?
Other major central banks such as the US Fed and the Bank of England have already changed course after years of flooding the markets with cheap central bank money. Since the meeting of the ECB Council at the beginning of February, there has also been agreement among Europe’s currency watchdogs that the stubbornly high inflation cannot be sat out. The European Central Bank (ECB) could take countermeasures by raising interest rates. However, Europe’s currency watchdogs have committed themselves to halting net bond purchases worth billions before taking interest rate hikes.
Economists expect the ECB Governing Council to make a decision to exit ultra-loose stance at its next monetary policy meeting on March 10. However, big steps should not be expected – especially not now that the escalation of the conflict over Ukraine is adding to the burden on the economy, which is still being slowed down by the pandemic.
“The geopolitical tensions are currently a very important risk factor, especially for Europe,” ECB chief economist Philipp Lane told the “Frankfurter Allgemeine Zeitung”. Recent geopolitical developments have “impacted not only on oil and gas prices, but also on investor and consumer confidence, trade and so on,” Lane said.
How have crises affected the stock markets in the past?
Stock markets around the world plummeted after the attack on Ukraine. “The worst fears have come true. There is war in Europe,” said portfolio manager Thomas Altmann of QC Partners. An often-cited stock market wisdom, however, is: “Political stock markets have short legs”. In other words, politicians are not able to permanently influence the capital markets in one direction or the other.
The German stock market recovered somewhat on Friday. The US stock exchanges had a supportive effect, although they had also slumped the day before, but then found their way into the profit zone and closed just below the daily high. “As a rule, political crises have a negative impact on the stock markets. How severe and how long depends on the course of the respective crisis,” says Christine Bortenlänger, head of Deutsches Aktieninstitut. The stock institute repeatedly refers to historical data, according to which perseverance usually pays off when investing in shares.
How safe is gold in times of crisis?
Many investors regard the precious metal as a safe haven in turbulent times. Despite price fluctuations, it never completely loses its value. The disadvantage: There is no interest or dividends for gold. Ultimately, the return can only be achieved from a rising gold price.