Inflation is a concern in Germany and has long since replaced Corona as a top issue. But how bad is the current situation? And above all: How long will it last? FOCUS Online asked the economics professor Monika Schnitzer.
FOCUS Online: Inflation is a topic of fear, and we journalists also notice that in the interest of the readers. Specifically, how bad is inflation in Germany for the economy at the moment?
Monika Schnitzer: It’s understandable that people are worried because inflation is higher than we’ve seen before. And it’s also surprisingly higher than expected. Last year we had forecast that inflation would be a temporary phenomenon due to the pandemic and the absence of the sales tax cut. It was clear that this would lead to inflation, at least temporarily. The same applies to the introduction of CO2 prices for heat and transport. And then it was thought that the remaining price increases were a sign of the economy picking up. But it is only now that one can see that the massively rising energy prices were already a harbinger of the warlike actions in Ukraine. You didn’t expect that. And precisely because this was not expected, the ECB did not react so quickly either, and therefore no countermeasures have been taken yet.
FOCUS Online: How much does high inflation weaken our economy?
Schnitzer: What is difficult for the economy are the current energy prices. The economy was already suffering from supply bottlenecks during the pandemic, for example with cable harnesses or chips. Now there are the sharp rises in energy prices. That’s a problem for the economy. If there were now also high wage increases, that would further increase the costs. And here we have to reckon with the fact that these cost increases will then also be passed on and will lead to even higher price increases. This is the famous wage-price spiral.
FOCUS Online: What does it depend on whether this wage-price spiral occurs or not?
Schnitzer: How the unions are negotiating now, whether they insist on inflation compensation or whether they are content with one-off payments, like Verdi did last year. It would be desirable if inflation were not compensated for immediately, in order to prevent us starting this spiral. But of course the pressure is enormous because people are feeling the inflation in their wallets.
Monika Schnitzer is an economics professor at the Ludwig Maximilians University in Munich. Her areas of specialization are competition policy, innovation economics and multinational companies. Since 2020 she has also been a member of the German Council of Economic Experts.
FOCUS Online: How long will we see inflation numbers as high as we are at the moment?
Schnitzer: We will still have to live with the high inflation this year and we will not immediately experience a decline next year either. But what happens next depends on how the energy supply develops. When supply stabilizes, prices will also stabilize. In this respect, it is not to be expected that we will experience constant inflation. However, if we get a power outage, we will also see a recession as that would have a massive impact on production. Even in this case, the prices will not continue to rise during this phase. So this is all extremely uncertain.
FOCUS Online: What do you base your inflation prospects on?
Schnitzer: I look at the market. Here we see that the yield on government bonds is now positive again. Investors now see the likelihood that long-term interest rates will rise as higher than they did a few months ago. It is therefore to be expected that interest rates will now rise again and that inflation will also be curbed.
FOCUS Online: In the European Union, the central bank is the guardian of interest rates and thus of inflation. However, last year and so far this year it was clearly wrong with its inflation forecasts. Is the ECB reliable as the guardian of inflation?
Schnitzer: We in the Advisory Council also forecast significantly lower inflation than has now occurred. We were all simply taken by surprise by the vehemence of the events. It is now evident that inflation will not go down. It would be too optimistic to think that this would have been done by the end of the year. Therefore, there are increasing signs that the ECB will react soon. Mrs. Schnabel in particular has been making hints in her speeches for months, on the one hand about energy prices and on the other hand about the shortage of skilled workers, which has been with us for a long time and will continue to do so for a long time to come. As a result, the production costs and thus also the price pressure will increase again. With this, Ms. Schnabel has already prepared the ground for an interest rate reaction to be necessary sooner than expected.
FOCUS Online: Why has the ECB been hesitant to raise interest rates?
Schnitzer: The big concern was always that raising interest rates would stifle the economic recovery, especially when it was particularly needed. But even if the ECB were to raise interest rates now, we would still have negative real interest rates. This means that we must first stabilize inflation – and at a rather low level.
FOCUS Online: In your opinion, how high would the key interest rate have to rise and when?
Schnitzer: The ECB announced from the start that it wanted to wait until the end of the bond purchases. That will be the case in July. So there would be nothing to prevent the interest rate hike from taking place in July as well. Then the figures from the second quarter would also be available. There is a lot to be said for taking small and multiple steps of 0.25 percentage points this year. I don’t think an increase of 0.5 percentage points this year is implausible.
FOCUS Online: Is the ECB up to the current situation with its many members? By no means all countries in their Council are in favor of an interest rate hike?
Schnitzer: So far, the concern has been that an interest rate hike would burden countries that have high debts. But given high inflation, even a modest hike would still sustain the negative interest rates. So you can still be confident that these countries will not get into trouble. As a result, voices in the Governing Council in favor of a rate hike are increasing. The members of the Council are aware of this responsibility, especially in view of the fact that massive interest rate hikes have now been carried out in the USA and more have been announced. Although inflation in the USA is still higher than here, this interest rate hike is putting us under pressure. The euro is lower than it has ever been. At some point you can no longer escape this pressure.
FOCUS Online: How do you see the federal government’s anti-inflation policy?
Schnitzer: Monetary policy is the task of the central bank, in our case the ECB. We could cap prices in Germany, but I think that’s the wrong approach. It is important to help those who can no longer afford the prices at the moment without interfering with the price mechanism itself. Basically, I think flat-rate payments, such as the energy bonus, are correct.
