According to Hans-Werner Sinn, inflation develops through an initial trigger, reinforcement effects and possibly new, external triggers in the future. The first trigger clearly lies in the disrupted supply chains and bottlenecks caused by the pandemic, in Europe and globally. The delivery bottlenecks will probably be overcome by the middle of next year. After that, however, the reinforcement effects will have to be taken into account. However, the current wave of inflation is only partially temporary. Even if current inflation subsides, people fear that it will get more expensive. In anticipation of price increases in the future, buy them beforehand.
Specifically, it is about durable consumer goods such as cars, washing machines or refrigerators, which one prefers to buy, or even houses and apartments. The higher demand then drives prices up again. But that’s not all. Because then above all there is a threat of a wage-price spiral. The unions will add this year’s inflation to their demands in wage negotiations next year. And so the euro zone is already in the next round, because companies are being forced to raise prices because of their increased costs.
One of these effects is, for example, the energy transition. Many parts of Europe are gradually eliminating the cheap traditional energy sources because politics forbids them. The alternatives are definitely not cheaper. If it were so, the markets would have chosen these alternatives on their own, says Hans-Werner Sinn.
The ban is forcing the economy to switch to much more expensive energy. The energy transition will massively increase production costs. Germany and most of Europe want to abolish all traditional energy sources right away: coal, nuclear energy, oil and even natural gas by 2045 at the latest. According to the economist, this will lead to new inflation at a level that will make the price increases caused by OPEC in the 1970s look meager.
While the US is reacting to inflation by raising interest rates, the Europeans will find it difficult to follow them out of consideration for the heavily indebted southern states. This results in a difference in interest rates. The capital flows into the dollar and appreciates it, the euro on the other hand depreciates – we already have an imported inflation. And then there is the demographics. The baby boomers want to stop working soon, but they still want to eat. So the demand meets a shrinking supply. That also means inflation. In this respect, we are today in a phase of historical upheaval.
The well-known economist Hans-Werner Sinn sees mainly the middle class as the loser of such a development. People who have life insurance, for example, would already lose interest due to the loose monetary policy. In the event that the savings themselves also lose value due to inflation, the economist predicts that people would revolt and express their displeasure.