In Germany and Europe, inflation is likely to be close to a cyclical high. Although inflation is expected to weaken in 2023, economists expect persistently high inflation due to demographics, deglobalization and decarbonization.
Citizens complain about the high rate of inflation: In October there was a demonstration in Berlin, at which the sharp rise in prices was also an issue.
People in Germany can breathe a sigh of relief in view of the enormous inflation, but it is still much too early to give the all-clear. In November, the inflation rate is according to a first estimate of the Federal Statistical Office dropped from 10.4 to 10 percent. The change in the consumer price index compared to the respective month of the previous year has thus stagnated at a good 10 percent since September. While the contribution of energy to inflation fell by a good 38 percent (previous month: 43), food prices rose again by 21 percent (previous month: 20.3).
Baltic countries with inflation over 20 percent
Inflation is at a very high level throughout the euro zone, and in Germany it is the highest it has been in seventy years. In November, 10.7 percent was reached in the euro zone, and the inflation rate in the Baltic states has been around 20 percent or higher for months. Eurostat will only publish the values for November on Wednesday.
The economists at Deutsche Bank expect that inflation will not peak in the euro area until early 2023. The Commerzbank chief economist Jörg Krämer recently said in an interview with journalists that he expects a falling inflation rate for the coming year due to the gas and electricity price brakes and the falling oil prices on the markets. However, he still expects inflation of 5 to 6 percent for the fourth quarter. In his view, the core inflation, from which the volatile prices for energy and food are calculated, is unlikely to fall.
When making their forecasts, economists look primarily to three sources: the expectations of market participants, economists and citizens. Observing the last group has gained importance in recent months. It became apparent that more and more people have defected to the so-called inflation camp. As far as the average is concerned, private individuals in the euro area expect inflation of 4.5 percent in two to three years. The median is just under 3 percent (half of those surveyed expect inflation to be over 3 percent, the other half under 3 percent). As a result, inflation expectations in this group of 2 percent are beginning to ease. The European Central Bank (ECB) is aiming for this rate with its monetary policy in the medium term.
After much hesitation, the ECB, which is responsible for price stability in the euro zone, initiated the rate hike cycle in the summer and is gradually withdrawing further liquidity from the markets. From the point of view of many critics, however, the central bank started about a year too late. The rate of inflation in the euro area had already reached over 7 percent before the outbreak of the Ukraine war, and was already at around 5 percent in November and December.
According to many economists, Germany and the euro zone are now headed for a recession, which is likely to be mild. It will therefore probably not have a strong dampening effect on inflation.
Deglobalization, demographics, decarbonization
A growing number of economists assume that inflation will be and remain structurally higher in the coming years. The reason for this is the three Ds – deglobalization, demographics and decarbonization. In view of the Ukraine war and escalating conflicts such as that between China and Taiwan, many companies are rethinking their production locations and restructuring their supply chains (deglobalization). This is likely to lead to higher costs in the long term.
In addition, wage pressure is likely to increase again in many industrialized countries as baby boomers retire. In countries like Germany there is already a general shortage of labor and special skilled workers (demographics). In addition, the energy turnaround sought by numerous industrialized nations is likely to lead to rising prices for numerous products (decarbonization), at least for a certain period of time. Some observers also warn that decarbonization could not only create new dependencies, but also new distribution conflicts over other raw materials, such as lithium or rare earths.
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