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FOCUS writes:


This year could see the highest inflation in Germany since the Second World War. And that's not all: economists are already coming up with worst-case scenarios. Demonetization could also be accompanied by a slump in the economy - stagflation. Researchers believe that two factors in particular are essential for this.

According to Eurostat, our money is currently being devalued by 7.5 percent. And it could get worse in the course of the year. The Corona aid measures, the recovering economy after the pandemic and the high energy prices will ensure inflation in the euro area in 2022 that has not been seen since the oil crisis in the 1970s.

But the end of the banner days may not have arrived. Christian Sewing, CEO of Deutsche Bank and head of the banking association, said last week that inflation "could temporarily reach double digits this year" if the German government decides to impose energy embargoes on Russia.

There would then be a high probability, the bank president said, "that the German and probably also the European economy would fall into recession with long-term consequences." So further devaluation of
money and savings and a rise in unemployment.

Economists such as Professor Niklas Potrafke of the Ifo Institute now see the European Central Bank as having a duty: "The ECB should raise the key interest rate as quickly as possible. This is urgently needed to keep inflation in check." Economists see interest rate hikes as the most important step to contain the inflated money supply. But the ECB remains in Mediterranean tranquility. The Federal Reserve Bank in the U.S., the Fed, is also struggling to get off the ground when it comes to raising interest rates. It is too tempting for many countries to continue borrowing cheaply at low interest rates.

How serious is the situation now? And what factors could now lead to stagflation - in other words, a collapse of the economy accompanied by strong currency devaluation? And don't government aid packages, which are well-intentioned but also pump even more money into the economic cycle, have the opposite effect?

Markus Demary, senior economist at the Institut der deutschen Wirtschaft (IW) in Cologne, Germany, looks across the Atlantic with concern: "In the U.S. in particular, spending policies have an inflationary effect, as they seek to increase demand through consumer vouchers, for example. In Europe, government spending during the pandemic was limited to maintaining businesses affected by the lockdown through liquidity assistance and short-time working benefits, neither of which increased demand."

But this is now changing, says IW researcher Demary: "That's because investments in the energy transition and higher military spending are increasing demand for goods and services." The state continues to pump money into the inflationary system.

The IW has now identified six factors influencing stagflation:

De-globalization: the zero-covid strategy in Asia have led to container congestion via lockdowns at ports. Key raw materials and intermediates are not arriving or are arriving late. The rise in freight rates has made food prices more expensive. Russia's invasion of Ukraine has exacerbated the situation. Not only oil and gas, but also coal and uranium have become more expensive.
Decarbonization: The rising price of CO2 is supposed to make fossil fuels more expensive and thus force the transformation toward climate neutrality. However, since households cannot immediately invest in climate-neutral alternatives, the CO2 price first raises the cost of living.
Demographics: The shortage of skilled workers means that higher wages can be negotiated. A wage-price spiral is particularly the case in the U.S., where high unemployment means many labor contracts have to be renegotiated, and at the same time a wave of early retirements has set in, making labor scarcer. In Europe, the use of short-time allowances has mitigated this effect.
Digitization: Digitization has slowed inflation in recent years. Many electrical appliances have made a leap in quality without becoming significantly more expensive. This has a negative impact on the calculation of inflation. Due to the chip shortage, this effect has disappeared for the time being.
Government spending: With Russia's war on Ukraine, Europe needs to accelerate digital and climate-neutral transformation. Investments in cybersecurity and investments to mitigate energy dependence are needed. In addition, military spending must be increased. This will increase demand for goods and services. Shortages caused by container congestion in Asia will be exacerbated.
Monetary policy: Monetary policy did not have an inflationary effect in the years after the financial crisis, as states and also companies saved. However, due to the necessary investments in the energy turnaround and higher military spending, low interest rates are now having an inflationary effect.

And what are currently the biggest risk factors for stagflation? IW economist Demary sees two: "The zero-covid strategy and the associated container congestion at Asian ports, as well as the shortage and rising cost of energy due to Russia's war against Ukraine."

The Cologne-based IW is not the only one to draw a worst-case scenario. Professor Achim Wambach also sees a risk of stagflation. Wambach, president of the Center for European Economic Research (ZEW) in Mannheim, Germany: "In March, we observed the sharpest decline in ZEW economic expectations for Germany since the survey was launched in 1991," Wambach told FOCUS Online: "At the same time, expectations for the inflation rate rose."

And Wambach also sees the biggest risks for stagflation in a further rise in energy prices, for example due to an energy embargo, and supply chain issues, exacerbated by the lockdowns in China.

So the economists in Cologne and Mannheim agree on the risk analysis here. Wambach: "Another risk is the behavior of the central banks. They have to fight inflation without choking off the economy," says Wambach: "It won't be easy to get the increased inflation expectations back under control."

Translated with www.DeepL.com/Translator (free version)


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