Inflation is already underway and it will continue to come in waves – but the European Central Bank (ECB) is playing it down. That is the assessment of Hans-Werner Sinn, one of the most prominent economists in Germany. In his now traditional Christmas lecture at the Ifo Institute, of which he was director for many years, he doesn’t mince his words.
“We drive a car without brakes – and the slope can come.” In the EU, the inflation rate rose to 4.9 percent in November, in Germany to 5.2 percent, in the USA to 6.9 percent. “We have an inflation that has not been seen in living memory, as it may only occur once in a person’s life,” said Sinn. In contrast to the ECB, he warned of rising inflation a year ago; unlike the ECB, he continues to expect rising inflation.
For example, Sinn referred to the inflation rates for intermediate products. The inflation of commercial producer prices was 17.5 percent in Germany in November, and even 31.8 percent in Spain. According to figures from the Federal Statistical Office, the rate, with the exception of 1951, was not higher in any post-war year than it is today. Even with the big oil price shocks it was only 14.6 and just under ten percent. Thus, Germany is experiencing the strongest inflation in commercial producer prices in 70 years.
“This situation is completely extraordinary,” emphasized Sinn. Now it is only a matter of time before these price increases also reach end consumer prices. The gloomy outlook: “Inflation will come in waves.” Because the unions are reacting to the price increases and have to push through stronger wage increases – as has already happened in Austria, by the way – a wage-price spiral threatens.
The economist also mentioned other factors that he believes will lead to higher inflation. This included people’s expectations of inflation, for in future they would buy goods earlier than they actually intended. The transition of the baby boomers to retirement also means that more and more people only consume but no longer produce, which is why there is a “surplus of demand”. Then there is the “dollar-euro interest rate differential”: the euro depreciates against the dollar, which leads to imported inflation and, ultimately, further increases in energy prices.
The traffic light coalition is also threatening to become a driver of inflation. The top economist called the increase in the statutory minimum wage, which shifts the entire wage scale upwards, as well as “hidden debt”. Hans-Werner Sinn mentioned the borrowing by existing state companies and the Kreditanstalt für Wiederaufbau, the extension of the repayment by adapting to EU rules from 20 to 36 years and the special fund for climate protection. Even the planned complete switch in Germany to green energy sources will not make energy cheaper for Germany, rather the other way round. Wind and solar currently account for just 7.5 percent of total energy consumption in Germany.
In Sinn’s opinion, the ECB is almost powerless because it has itself destroyed the inflation brake. With her government bond purchase worth 3.9 trillion euros, states have indirectly financed over the past few years. It is actually forbidden to do so, which is why the financing takes place indirectly via the secondary market. The dilemma: some states could no longer service their debts, the ECB can no longer simply raise interest rates, and now they would actually have to sell back the government bonds, but then interest rates rise again. Banks would then also face over-indebtedness, chaos on the financial market would be inevitable.
What is really needed is price stability, which the central banks are there to safeguard. But the ECB does not want to admit that there is inflation. But “you have to put out the fire and not wait to see whether it really burns out,” he demanded.
In fact, the ECB is still remarkably optimistic about inflation – although it had to continuously revise its forecasts upwards over the past year. For 2021, she forecast an increase in consumer prices of 0.9 percent in the euro area in January. In November inflation had finally risen to a record level of 4.9 percent.
In some cases, the ECB is already reacting, at least a little: Although it is still not raising the key interest rate, its bond purchase program PEPP, which it started in the wake of the corona pandemic, is likely to be switched off in April 2022. Their forecasts for the next three years are strikingly positive again: inflation will be 2.3 percent in the coming year, and below two percent in the two following years 2023 and 2024. These are assumptions that Sinn will certainly not share.
The German economist Gunther Schnabl criticized in an eXXpressTV interview that the ECB had to correct its inflation expectations upwards several times: “It is the task of central banks to anticipate inflation and contain it. I can’t watch that. The ECB in particular is lagging behind the inflation forecasts and adapts them to the officially increased inflation rates. “