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Inflation in Germany: ECB advocates even higher price increases

Situation in Germany: Even before the pandemic, the cost of living had reached the limits of many private households.

The hyperinflation of 1923, when wages were paid out on a daily basis and, in the end, cash was transported in laundry baskets and wheelbarrows, has burned itself deeply into the collective memory of Germans.

Statements from the highest management body of the European Central Bank (ECB), which suggest the desire for higher inflation rates, are correspondingly explosive. Isabell Schnabel, a member of the six-person ECB Executive Board, gave a speech on September 13 at the 148th Baden-Baden Entrepreneurial Talk entitled “New Narratives on Monetary Policy: The Specter of Inflation”. The 50-year-old used her speech, among other things, to sharply criticize the media. According to the ECB director, “especially in Germany, many 'experts' and the media are currently serving people's fears without explaining the causes of the price developments”.

"Prices too low rather than too high"
The business press picked up on the speech, however, primarily because of Schnabel's statement that “inflation is currently still too low rather than too high”. In this context, Schnabel referred to the so-called base effects of the pandemic, which should be taken into account. Since many prices had fallen due to the pandemic restrictions in 2020, the increase is now all the more violent. For German consumers, this effect will be reinforced by the temporarily lower value added tax in the second half of 2020. These arguments are correct.

However, it is rarely mentioned that the Federal Statistical Office also registered a 1.1 percent decline in real wages in the pandemic year 2020 compared to 2019. The loss of income of the self-employed and freelancers, who completely lost their business basis last year, are not even taken into account.

It is also a fact that for part of the population of Germany the daily cost of living was already reached before the pandemic year 2020. For example, in an international comparison of pension systems in 2019, the Organisation for Economic Co-operation and Development (OECD) came to the conclusion that full-time employees only receive comparatively low pensions after a full working life as pensioners.

As recently emerged from a response from the Federal Ministry of Labor, 82 percent of statutory pensions in Germany amount to less than 1,500 euros per month. According to data from the Federal Statistical Office, 15.6 percent of pensioners in Germany were even below the poverty threshold, which is 917 euros a month.

The situation of many tenants in major German cities has also been precarious for years. By evaluating the microcensus for 2018, researchers at the Humboldt University of Berlin found that every second of the approximately 8.4 million households with a rental apartment in a major German city spends more than 30 percent of their net income on rent. A quarter of the big city households even spent more than 40 percent of their income on warm rent and ancillary costs. These households have less money left for food and clothing due to the high burden placed on their homes.

The effects are correspondingly strong if the costs of food, electricity or gasoline also go up. In view of the sharp rise in prices, the social association VdK had already warned in August that, for example, fruit and vegetables are becoming more and more luxury goods for low-wage earners and people with basic social security. In the course of the gradual increase in carbon dioxide prices, broad sections of the population are threatened with the fact that electricity, heating and individual transport will achieve luxury status for them in the coming years.

Luxury fruit and vegetables
Like the ECB board member Schnabel, the US Federal Reserve is maintaining its prediction that the current wave of rising prices is temporary. However, in her speech, Schnabel herself pointed out factors that may increase price pressure in the long term.

The disruptions in the supply chains and also the high raw material prices can last longer. In addition, products such as durum wheat, coffee and cotton are already showing signs of a shortage on the world markets and thus a next price surge. So far, the inflation-driving effect of the stimulus packages that are now being launched has hardly been discussed. If in the USA President Joe Biden wants to stimulate the economy with 1.9 trillion dollars or the EU Commission distributes 750 billion euros from the Corona reconstruction fund to the EU member states, then of course this also has a price-driving effect.

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