Prices have been rising across the board since 2021. On average, how much has the life of the “average Austrian” become more expensive since the beginning of 2021? Can you tell?
For the average Austrian, life has become an average of 7.8 percent more expensive since the beginning of 2021. Everyone feels that. We warned of higher inflation a year ago, when we were laughed at. Today, everyone stopped laughing in the face of the sharp price increases.
Forecasts are difficult at the moment, but how expensive will our lives be by the end of this year, assuming the war in Ukraine continues and the ECB only changes course minimally?
It is clear that the high prices will accompany us throughout the year. In some areas – such as energy – the big boosts are only just beginning. And they will be noticeable well into the coming year. And we’re not even talking about how a possible embargo could affect Russian oil and gas. Nor should we be surprised if inflation hits the ten percent mark in a few months’ time. Much also depends on the behavior of the ECB. It would have to raise interest rates sharply, which hardly any state budget can currently withstand. We at Agenda Austria have always warned against debt orgies in boom times. Because this makes every state vulnerable to external events. And now, with Corona and Ukraine, we have had two such external events.
The trade unions are already demanding substantial wage increases and have in some cases already implemented them. This is hardly surprising. Does it also cause problems?
The demands of the unions are understandable. Of course, this increases the danger of a wage-price spiral. We are already seeing the harbingers of this. Strong wage increases would solidify the high rates of inflation and stay with us for a long time. But especially if inflation rates remain high, there is a high probability that the unions will stick to their high demands. But it will take time for the wage-price spiral to actually turn. It is therefore important to fight high inflation rates early on. Relief would bring a strong tax cut for employees. And the abolition of cold progression, which we have been calling for for a long time. The fact that the state is also taxing wages to compensate for inflation in times like these borders on insolence. This means that the unions would not have to force such high gross settlements in order to get the same net result for the employees.
According to the European Central Bank (ECB) and some economists, energy prices are primarily or exclusively “to blame” for the price increases. Would you agree with that?
This explanation comes mostly from economists who have been telling us for years that there will be no high inflation rates because the ECB can safely print money. In addition, not only energy has become more expensive in Austria. Almost eight out of ten goods in the entire basket are now showing price increases of more than two percent. The basic problem: A scarce supply also meets an enormously high demand for times of crisis. The latter would be unthinkable without the monetary policy of the ECB. After the financial crisis, cheap money was still circulating in the financial sector. Now it arrives in the Corona packages in the companies and households, which hand it out with both hands. Unfortunately, the supply is still scarce due to the supply chain problems. The consequences are price increases across the board.
Since the beginning of 2021, the ECB’s inflation forecasts have consistently been underestimated. What do you attribute that to?
It is not easy to make the right forecasts in such an uncertain time. The uncertainties are enormous, as is the combination of the Corona crisis and now the Ukraine conflict. This is what makes predictions so difficult. You shouldn’t blame the ECB for that either. However, you have to accuse her of still speaking of a “temporary price increase” in autumn 2021. Where it must have been clear to everyone that we will have to live with high prices for a longer period of time. ECB President Christine Lagarde should also be criticized for saying that having a job should be more important to us than having our savings secured. A politician could say that. But not someone whose primary task is to secure the monetary value.
The German auto industry is already anticipating a massive slump. The war also threatens an economic slump and thus stagflation. They warn against it. Why is this so dangerous?
Stagflation threatens prosperity from two sides: economic output stagnates or even declines, while inflation rates weaken the purchasing power of citizens. Normally, growing economic output goes hand in hand with higher inflation, and falling one with falling prices. In a “normal” economic crisis, the procedure is also clear: the state can intervene to provide support, the ECB can lower interest rates and thus stimulate consumption and investments. But with stagflation, the problems come from tight supply. In stagflation, the government can intervene to help, but central banks would have to raise interest rates to get inflation under control. As a result, people would spend less and save more. In addition, the euro exchange rate would be strengthened, making imports cheaper. Whether there will be stagnation in Austria depends very much on whether we continue to be supplied with gas from Russia. If not, then not only stagnation but a severe recession is to be expected.
What should the government do?
Let’s start with what the government shouldn’t be doing: walking the country with a conveyor watering can. The state cannot compensate the entire population for undesired price increases. Neither should the state. But what he is supposed to do is to support the poorest of the poor so that they can heat their homes. That’s what the welfare state is for. What the government can also do is finally noticeably reduce the exorbitantly high taxation of labor. About a reduction in tax rates and the abolition of cold progression. This increases the purchasing power of citizens, as already mentioned at the beginning.
What should the ECB do?
The ECB’s job is clear: the expansive monetary policy must come to an end and interest rates must rise. She is currently keeping all her options open and would like to stop buying government bonds first before raising interest rates. It would be best to do both at the same time. Instead of continuing to supply the states with cheap money, it should finally concentrate on its main task again: ensuring stable prices.
Do you expect a noticeable slump in prosperity in the coming years?
The risk of this has increased. In particular, if the supply of Russian gas were to be interrupted, we would face a significant loss of prosperity. It doesn’t matter whether Russia cuts off our gas or whether we decide to stop imports at EU level for political reasons. At the same time, it is becoming apparent that overcoming the Corona crisis will take longer than was assumed some time ago. Even a good two years after it began, there is still no end in sight. At least we have been above the pre-crisis level since the beginning of the year. And then there is a problem with supply chains and scarce raw materials hanging in the background. Even if we do not suffer any noticeable loss of prosperity in the coming years, we must assume that the increase in prosperity will lose momentum.
Should politicians prepare citizens for difficult times and communicate this accordingly?
What should be clearly communicated is that a crisis does not leave us unaffected. It is painful, it costs wealth. The crisis that no one feels has not yet been invented. And it cannot be printed away with banknotes either. It must also be made clear to the citizens of this country that the state cannot protect them from all injustice. That’s not his job either. However, many citizens see things differently, which has a lot to do with the corona pandemic.
