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Pandemic-related inflation spooks Germans

Boehme Henrik Kommentarbild App
Henrik Böhme
October 1, 2021

Consumer demand, shortages and other pandemic-related factors are combining to drive up prices. Germans, especially, are sensitive to inflation. But there is no reason to panic just yet, says DW's Henrik Böhme.

Hand holding fruit at vegetable stall
Food and energy prices have shot up in GermanyImage: Andreas Arnold/dpa/picture alliance

If you want to know how currency devaluation works, look at Venezuela. There, money is worth practically nothing. Until Thursday this week, €1 was the equivalent of 4.8 million bolivars.

It gives you an idea of what Venezuelans currently have to pay for a loaf of bread. According to calculations by the International Monetary Fund, the annual inflation rate is likely to be 5,500%.

In August, Venezuela announced it would be slashing six zeroes off its inflation-battered currency and introducing a digital currency, the "digital bolivar" as a means of payment, beginning October 1.

Compared with the rampant hyperinflation in Venezuela, the paltry 4.1% month-on-month increase in prices in Germany seems trifling. But it's still the highest increase in 28 years, and that's enough to make headlines and raise existential questions such as "is my money still safe?" "Can I still afford my current life, pay off my house?"

Almost forgotten economic terms such as "imported inflation," "dangerous wage-price spiral" and even "stagflation" — a stagnating economy with simultaneous inflation — are suddenly being bandied around. A phenomenon that was thought to be dead is back.

Fear of losing savings

It's important to provide context. Germans' fear of their money losing value is deeply etched into collective memory. It includes the bitter experiences of hyperinflation in 1923 as a result of the World War I, the currency reform after the World War II in 1948 and reunification in 1990, which left many East Germans, especially, unable to convert their entire assets into deutschmarks.

Henrik Böhme
DW's business editor Henrik Böhme

In addition, in 2002, Germans had to deal with the loss of the beloved and strong D-Mark to the euro, which had to be shared with countries like Italy or Greece that had a comparatively relaxed attitude to fiscal discipline.

The reasons for the current high inflation are obvious. The list is long and has mainly to do with the COVID-19 pandemic. First, there is the extremely low inflation rate of last year, the return to the previous VAT rate, which had been lowered because of the coronavirus and a dramatically large surge in demand around the world to catch up on investments that were canceled because of the pandemic.

Global growth has caused oil and gas prices to rise exponentially, and in Germany the new CO2 tax is making energy prices even more expensive. As if that were not enough, a disruption in global supply chains means there's a shortage of goods and that is also driving up prices.

Higher prices battering entire system

As a result, everything that Germany has to import is also becoming drastically more expensive. Compared to last year, natural gas prices have risen by a whopping 178%, iron ore by 97% and coffee prices by a third. This is what is behind "imported inflation." Companies have been forced to pass on the higher prices to their customers if they do not want to suffer losses themselves.

German firms seek suppliers closer to home

Inflation continues to batter the economic system and there is no relief in sight, even though the monetary guardians of the European Central Bank (ECB) are trying hard to speak of a "temporary phenomenon."

However, it's obvious that the transition to a climate-neutral economy in Germany, for example, is going to be first and foremost a massively expensive project — a project that will definitely not lead to any easing in the skyrocketing prices. Nor will the reorganization of global supply chains, which many are calling for. On the contrary, this too will ultimately lead to rising prices if the supplier is no longer the cheapest but the most reliable.

Shipping containers stacked in a port
Supply chains have snarled around the world, adding to transport costsImage: Zhang Jingang/VCG/Maxppp/picture alliance

Another reason for the jump in prices is the large amount of money that central banks have pumped into the markets in recent years. Of course, this has also helped to keep ailing economies afloat.

But now the European Central Bank faces a dilemma. If it raises interest rates — which it will have to do at some point to fight inflation — it will be much more expensive for crisis-hit countries to reduce their mountain of debt. Or are the central bankers even deliberately allowing inflation to rise in order to devalue the mountains of debt?

What can be done?

What's needed now are the right decisions at the right time. It's the job of the central banks to find precisely this moment even if it's initially only through words. (Remember former ECB chief Mario Draghi's "whatever it takes"during the euro debt crisis?) 

But it's also up to policymakers to maintain a sense of proportion with their call for a higher minimum wage. That would drive up the entire wage structure and set in motion a dreaded wage-price spiral that is difficult to stop.

The situation remains complicated. Markets have now become so addicted to the sweet drug of cheap money that withdrawal is likely to be difficult. People, on the other hand, must be able to trust the central bankers, because even perceived inflation can trigger actual inflation.

So, there is still no reason to panic. But there is reason to be particularly vigilant.

This article has been translated from German

Boehme Henrik Kommentarbild App
Henrik Böhme Business editor focusing on international trade, cars, and finance@Henrik58