One year of economy in lockdown: Corona is bringing back inflation

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Monday March 22, 2021

A year of economy in lockdown
Corona brings back inflation

The pandemic has destroyed the life’s work of thousands of entrepreneurs, destroyed and newly created assets on the stock exchanges, made millions of jobs unsafe and shook Germany’s solid state finances. Amongst other things. One year after the start of the previously unthinkable, a state-ordered shutdown of large parts of the economy, ntv.de draws a balance in the spotlights. Episode five: Why prices first fell during the crisis and now rise again.

The previous episodes of “One year economy in shutdown”:

  1. From stock market crash to soaring
  2. Only a mountain of debt remains of the lifelong dream
  3. Last hope online shop
  4. In the waiting “hell” of Corona aid

The pandemic is not over yet. However, in view of the progress in vaccination, an economic recovery is slowly becoming apparent worldwide – supported primarily by the USA and China, the two largest economies. This increases the prospect of rising inflation. Inflation has not been an issue in Germany since the first lockdown in March 2020. How then? The demand for and the supply of products and services had collapsed – so there was no room for rising prices. On the contrary: from July to December consumer prices actually fell.

But things have been on the up again since the beginning of the year, with prices climbing 1.3 percent in February. With the prospect of an end to the pandemic, inflation is about to make a comeback. Although the inflation rate is still relatively subdued, that could soon change. There are mutliple reasons for this:

  • The United States is likely to grow 6.5 percent this year, Bank of America predicts. For China, economists are even anticipating an increase of around 8.5 percent. That brings with it sharply rising prices for raw materials.
  • With every industry that emerges from the lockdown, the economy gains momentum.
  • When shops reopen after being closed for weeks, many will raise prices. High costs due to hygiene concepts and the weeks of loss of income leave them little choice.
  • After the crisis has subsided, there could be a real consumer frenzy. Many consumers inevitably saved a lot of money in the lockdown – for example through unusual vacation trips, visits to restaurants and the theater.
  • The state is also likely to turn the price screw this year. According to a survey by the management consultancy EY, a majority of 64 percent of cities and municipalities plan to increase taxes or charges, for example for garbage collection or parking.
  • There is also a statistical effect: In the second half of 2020, the federal government lowered the VAT rates in order to stimulate the economy in the midst of the pandemic. As a result, prices even fell at times. The usual rates have been in effect again since the beginning of the year. The result: From the second half of the year onwards, the inflation rate is likely to rise noticeably, as the goods and services that have been discounted by the tax cut will then be used as a benchmark.

As a result, there is already movement in the financial markets: bond yields are skyrocketing. The trend-setting government bonds from the USA and Germany are as high as they were last around a year ago.

More about how Corona affects prices, read You in the detailed coverage of ntv.de:

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