How inflation will affect us in the future

The last time a calendar year ended with an inflation rate of over three percent was almost 30 years ago – in 1993. In the following years, inflation behaved like a sine curve and, to the relief of consumers, fell to below one percent at times – in 2009 it was as low as 0.3 percent. You are probably all aware of the reason for this – the 2008 financial crisis. So it is no wonder that there is great uncertainty as to how inflation could develop in this way – and above all: do we possibly have to get used to an inflation rate of over three percent?

Many economists and financial experts looked at the development of inflation in the past year with a keen eye, as there were clear signs of rising prices, both nationally and globally – significantly more than in previous years. After all, consumers in Germany were faced with a number of new factors: higher energy prices, the introduction of the_{CO2 flat rate} and base effects from 2020 – such as the temporary reduction in VAT. Global factors such as the ongoing supply chain problems, regional lockdowns in countries from which we import goods and raw materials and the ongoing shortage of skilled workers in some sectors are also playing a major role. The fact that containers are also in short supply in China and that the cost of booking a 40-foot container has more than doubled is doing the rest to put local entrepreneurs in trouble.

In the following, I will focus on the economic aspects of the current inflation situation. Nevertheless, I would like to emphasize that it is primarily the economically weak households and low-income earners who are currently feeling the effects of rising prices in their wallets and are quite rightly worried about the rate of inflation in the coming weeks, months and perhaps years.

Prices rise worldwide

Rising inflation is not a German phenomenon: consumer prices rose worldwide last year. While food prices in Turkey rose by up to 43 percent and energy costs by 50 to 125 percent, prices also increased in numerous EU countries such as Spain (6.5 percent), Italy (3.9 percent) and the Netherlands (5.7 percent). The USA even closed 2021 with inflation of seven percent – the highest since 1982.

When it comes to the question of how the inflation rate could develop in Germany in the coming years, experts are largely in agreement: Philip Lane, Chief Economist at the ECB, said at the beginning of January that he expects inflation to level off at two percent over the course of this year and stabilize below this target value in the next two years. The most important economic institutes in Germany are of the same opinion – even if Clemens Fuest from the Ifo Institute for Economic Research in Munich, for example, does not expect inflation to fall until after 2023. After all, according to Fuest’s predecessor Hans-Werner Sinn, many people fail to realize that we have had an almost deflationary price trend in recent years.

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Dealing with inflation

Marcel Fratzscher, Director of the German Institute for Economic Research (DIW), points to the ECB’s monetary policy over the past 23 years, with an average inflation rate of 1.5 percent. Fratzscher clearly states that we have to take climate protection seriously and accept that prices for sustainable forms of energy will rise – which fossil competitors are also doing. He also says that rising inflation will lead to a kind of normalization. Joachim Nagel, the new President of the Bundesbank and therefore also a member of the ECB Governing Council, and some financial experts are also calling for the ECB to tighten its monetary policy. So far, however, it seems as if Christine Lagarde will stick to her zero interest rate policy and there will be no interest rate hikes. The extent to which Nagel and some of his Council colleagues will prevail in order to stem the flood of cheap money remains to be seen.