Inflation is at its highest level in decades. A trend reversal does not appear to be in sight. Will inflation become a long-term problem? And what can central banks do?
The tank discount is running out, the end of the 9-euro ticket is imminent – and consumers are now also faced with the gas levy. All of this will push the already high inflation even higher.
Jörg Krämer, a chief economist at Commerzbank, believes that these effects will only have an impact on the inflation figures in September: “For this reason alone, inflation should jump by around one percentage point in September,” says the analyst. “Then we’ll probably get well over 8.5 percent.”
The Bundesbank is even assuming an inflation rate of ten percent this autumn. For a long time, the central banks underestimated inflation and saw it as a short-term phenomenon. In the meantime, however, the tide has turned. Central banks around the world have started raising interest rates. Things are going up particularly quickly and strongly in the USA. The European Central Bank has only ventured a large interest rate hike of 0.5 percentage points – despite inflation of 8.9 percent in the euro area.
A new course of the ECB?
But the ECB is also likely to be much more determined in the fight against inflation. At least that’s how statements by ECB Director Isabel Schnabel at the important central bank meeting in Jackson Hole, USA, this weekend can be interpreted: “In order to win back and maintain confidence, we have to bring inflation back to the target value quickly” – completely new tones. Commerzbank expert Krämer even sees this as a turning point. “Central banks are certainly going through a turning point at the moment,” he says. “The central banks have to change completely because up to now, they have concentrated on getting inflation back up again, which they believe is too low.”
But can the ECB stop exploding energy prices with higher interest rates? Not in the short term, because interest rate increases only take effect after twelve to 18 months. Nevertheless, the ball is clearly in the playing field of the central banks when it comes to fighting inflation, says Thomas Mayer from the Flossbach of the Storch Research Institute. Inflation compensation payments by the state are perhaps sensible and necessary from a socio-political point of view; however, inflation itself is not being combated in this way. “Ultimately, central banks either allow inflation or not. For many years they’ve wanted to increase inflation, and now they’ve lost a bit of control.”
Trust is key
The central banks must now take countermeasures all the more strongly. The ECB could even raise interest rates by up to 0.75 percentage points in September. This is already being played out on the stock markets. The DAX has fallen significantly since the central bank meeting in Jackson Hole. Because higher interest rates slow down the economy, unemployment could rise. But the price would be even higher if prices continued to rise unchecked. After all, what is important for the actual inflation rate is people’s inflation expectations, says economist Mayer. “Of course, the value of money depends a lot on whether people have confidence in its value. If they lose that confidence, then we go into a downward spiral.”
Because if inflation expectations remain high, there is a risk of a wage-price spiral of higher wage demands and rising prices. This would drive inflation further. The most important question is, therefore, whether the central banks can regain confidence in price stability.