Saturday, December 4th 2021
Inflation rises sharply
For these reasons, the ECB is taking its time
By Roland Lindenblatt
The inflation rate in the euro zone is well above the two percent target set by the ECB. The central bank is still sticking to its loose monetary policy. Why?
In November, inflation in Germany climbed to its highest level in 29 years. The Federal Statistical Office provisionally estimated it for November at 5.2 percent. It has risen again compared to October. At that time it was already 4.5 percent. The Bundesbank had already expected a similarly high inflation rate in a forecast last week. The highlight of their forecast, however, is the look into the more distant future.
Like many other economists, the Bundesbankers expect inflation rates to fall in the new year. But you also write that inflation could “remain well above three percent for a long time”. These are price increases that should soon call the ECB into action. After all, inflation in the rest of the euro area is only slightly lower, and it is also rising. The ECB could therefore react with fewer bond purchases or even increases in key interest rates. But apparently she doesn’t. At least not yet.
You have to know that ECB representatives have been insisting for months that the high inflation in Germany and other euro countries is temporary and is caused by special corona effects. “Put simply, inflation is so high today because it was so low in the previous year,” said ECB board member Isabel Schnabel at the Baden-Baden business talks in September.
Delivery bottlenecks remain longer than expected
On the one hand, the price effect is caused by energy prices. Because oil, gas and co. Were cheaper last year than they have been for a long time, but the pre-crisis level has long been reached again and in some cases even exceeded. In Germany, VAT was also three percentage points lower between July and December 2020 than it is today. If you compare today’s prices with those of the same month last year, when they were very low, this naturally leads to a high inflation rate. But it also means that inflation rates will fall again in the coming year.
If the ECB intervened, scaled back its bond purchases or even increased the key interest rate, it could stifle the upswing. The price increases due to special effects did not disappear. It would be a shot that backfires: less growth while inflation remains high.
It is more difficult for the central bank if the corona effects do not pass so quickly. In the case of the sales tax cut, this has been agreed. However, energy prices are rising steadily and may continue to increase prices over the next year. In addition, the raw material and supply bottlenecks that many companies suffer from could increasingly affect consumer prices. A large number of industrial companies are still complaining about delivery problems and expensive preliminary products.
According to a survey by the Ifo Institute, more companies than ever want to increase prices in the next three months – with clear consequences for consumer prices. “On average, we now expect an inflation rate of three percent this year and two and a half to three percent in 2022,” says the head of the Ifo economic forecast, Timo Wollmershäuser.
Higher wages or lower prices
Even against these price increases due to delivery problems, the central bank can do little for now. A tighter monetary policy with higher interest rates would make it more difficult for companies to expand their business with high freight and commodity prices, but the problem is only partly due to the high demand from companies. The capacity bottlenecks occurred because the whole world is on the upswing, but also because the corona pandemic has caused ship and container jams. However, the ECB should not act against a tight supply resulting from the crisis with a tighter monetary policy, otherwise it would only damage the European upswing.
It only becomes problematic if, given the scarce supply, demand in the entire economy rises so much that people also want to enforce significantly higher wages. Then the inflation trend could continue. The Bundesbank warned in its report that the new minimum wage of 12 euros per hour would also increase wage pressure. There is still no question of a wage-price spiral. However, the longer the corona effects last, the sooner inflation can solidify.
The central bankers have to weigh up whether they want to support the further economic upswing or keep inflation as low as possible. Or as ECB Council member Philip Lane put it at the beginning of November: “An abrupt tightening of monetary policy today would not lower the current high inflation rates, but rather slow the upswing and reduce employment in the next few years, thereby reducing medium-term inflationary pressures.”
The ECB is therefore acting rather cautiously at the moment. Nevertheless, ECB representatives have already announced a tighter monetary policy through the flower. In an interview with the Bloomberg news agency, Isabel Schnabel, the inflation all-clearer, said earlier this week: “I don’t think we can really say what will happen based on the current data.” However, they assume that the ECB is likely to revise its inflation forecast upwards, similar to the Bundesbank. Central bankers seem to be keeping their doors open to slowly end bond purchases.