The underestimated driver of inflation in Germany
That figure got under the skin of many: 5.2 percent inflation last month. There is increasing evidence that prices could soon rise much faster. The President of the European Central Bank, Christine Lagarde, is still practicing optimism, but has carefully adjusted her tone. Oddly enough, a possible driver of inflation is still overlooked.
"... gradually adjust ..."
Central bank governors need to weigh their words carefully. A single thoughtless sentence can cause turbulence in the financial markets. Because that is so, you have to read the statements of central bankers carefully - for example the long interview that Lagarde has now given to the Frankfurter Allgemeine Zeitung (FAZ). "We have had to gradually adjust our inflation forecasts over the past few quarters," she openly admitted, and continued: "I would say that we have learned from this: We have to keep checking our base scenario and adjust it if necessary."
Unfortunately, the head of the ECB left open what the current “base scenario” of the ECB consists of. It is obvious that those responsible for the euro simply think that they can allow the money supply to grow faster than the supply of goods in the long term without increasing prices.
An “adjustment” of the scenario would then simply consist in a return to what has been the consensus of economists for generations into the 21st century: If the money supply grows faster than economic output, then prices rise as a result of natural necessity. There may be circumstances in which this reaction takes years to delay, but then the adjustment is all the more violent.
The fact that we have reached this point is supported by a figure that the Federal Statistical Office announced two weeks ago. Producer prices in October were as much as 18.4 percent higher than a year earlier. The Munich economist Gerald Mann explains the connection as follows: “In the long term, consumer prices will develop almost exactly in line with producer prices.” At best, falling import prices could have a dampening effect, but this is the least visible: “At an annual rate of most recently, they rose by 21.7 percent even more than domestic producer prices. ”Therefore, according to Mann, significantly higher inflation rates in the near future would not be a surprise.
The dreaded momentum
One of the few top economists who has been pointing out the risk of inflation for a long time is the former head of the Ifo Institute, Hans-Werner Sinn. He currently fears that rising inflation expectations can become a self-fulfilling prophecy. “People are afraid that it will be more expensive. If expectation of price increases in the future, then you buy beforehand ”, Sinn now warned in an interview with Welt of additional demand for“ cars, washing machines, refrigerators, which one prefers to buy, or even houses and apartments. The higher demand then drives the prices again. "
What Sinn fears about washing machines and cars is already a reality with some raw materials. Companies react to shortages of intermediate products by trying to build up stocks. The direct consequence: Even more scarcity on the market and rising prices.
A word that Sinn used as little as he did a few days after Lagarde in the interview quoted above is “speed of circulation of money”. In fact, it is precisely the variable that makes the difference between monetary and economic growth when prices are stable. If, over the course of several years, the money supply has quadrupled, but economic output has only doubled, and yet prices have not increased, then mathematically this implies a decrease in the velocity of circulation by exactly half. In terms of prices, it makes a big difference whether there is money in accounts or whether you are in a hurry to “hunt for goods”.
The problem with the matter: With falling inflation rates and interest rates, the velocity of circulation slows down, with rising prices, but also with high or rising interest rates it increases again. If interest rates are close to zero and prices are barely rising, then you can simply leave money in your account without losing a lot or set larger sums at mini interest rates in the long term. A similar phenomenon: In the industrialized countries, hundreds of millions of people save in order to be able to maintain their standard of living in the face of the imbalance of the pension systems in old age. If interest rates fall, they tend to save even more in order to still achieve a certain savings target by the time they retire. This behavior, too, has caused the velocity of money to drop to historic lows.
Without this effect, it cannot be explained why the policy of printing money has not long since led to higher prices since the financial crisis of 2009. The big problem is in itself basic knowledge of all economists: This effect also works in the opposite direction and can then become the real driver of inflation.
Source: Preußische Allgemeine Zeitung
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