April 14, 2021

German inflation begins to pressure the ECB towards positive interest rates




Inflation in Germany is picking up speed. In February, consumer prices rose more sharply than since the beginning of the crisis, a year ago, with a rise of 1.3%. In January it had risen again for the first time in months, thanks to the new CO2 tax, and in the second month of the year the VAT effect, the end of the temporary reduction of VAT rates, from 19% to 16% and from 7% to 5% in the second half of 2020, in order to stimulate the economy. But this is not merely a temporary rise due to the VAT resettlement, warns Nils Jannsen of the Institute for the World Economy (IfW).

“Since despite this incentive, many people have been spending less on many things, such as trips, restaurants or events, some of the consumption could soon be offset and that can lead to a temporary increase in inflation», He calculates. Sebastian Dullien, Scientific Director of the Institute for Macroeconomics and Business Cycle Research (IMK) at the Hans Böckler Foundation, believes that the risk of inflation getting out of control in the medium to long term is low. After all, “In the Eurozone as a whole, capacities are still underutilized”Therefore, “the companies’ margin to set prices is limited.”

But no one escapes the fact that the reopening of commerce and services, after months of severe closure, will bring with it a desire to consume well above the usual. It is also no secret that energy prices will not help to ease the inflation rate. In February they registered a 0% evolution, after having fallen 2.3% in January, due to the new CO2 tax and the prospect of a better global economy after the recession. Starting in March, if oil continues to trade above $ 55, energy prices will weigh heavily. Commerzbank has warned that inflation can settle at 1.5% in the first half of 2021 and reach 3% in the second. And that would mean a considerable increase in German pressure on the ECB to return interest rates to positive territory.

The Bundesbank has acknowledged that German inflation has been rising since the beginning of the year “Well above our forecasts and those of the markets”. Bundesbank President Jens Weidmann admits that we will see German inflation above 3% this year and is already calling for a tightening of the ECB’s monetary policy, which will mean a higher cost of debt for the most indebted countries, such as Spain. financing. In an interview with the German newspaper Augsburger Allgemeine, Weidmann is quite aggressive, at least considering that we are still very bogged down in the crisis and that European aid has only just begun to reach those affected. Although it is clear that there is still a majority on the ECB Council to prolong low rates for as long as necessary, Weidmann has not been shy about noting that “Determination cannot be lacking” as soon as inflation approaches 2%.

The clearly upward inflation data is not exclusive to Germany, nor does it respond solely to the effects of impulse fiscal policies. Industrial activity in Europe records new highs in February not only in Germany, but also in Austria and Italy. In the euro zone as a whole, the manufacturing PMI has rebounded strongly to 57.9 points, bringing the data closer to its all-time highs than the levels immediately before the pandemic. Spain, without going any further, records its best data since last July. And supplier payments are skyrocketing to levels we haven’t seen in the last decade. It’s more, manufacturing companies complain of delays and difficulties in sourcing components and materials due to the increase in global demand, especially in Germany, Austria and the Netherlands, and they are impacting this price pressure on their products. Manufacturers’ sales prices in the euro zone increased in February at the strongest pace seen since the second quarter of 2018.

A recent report from Deutsche Bank downplays the danger of out-of-control inflation in a sustained way in the short term, but it hints at a much more dangerous scenario in about four years time, due to demographic change and the loss of the working-age population that will lead to “a possible decrease in supply with constant or increasing demand.” The document, written by the economist Sebastian Becker, indicates the loss of potential GDP as a measure of danger and also points to the change that will mean the greater concentration of market power, which implies that companies that survive the pandemic will have superior capacity pricing. In the shorter term, he points out that we are about to see an increase in demand as a reaction to repressed demand during the period of restrictions in sectors that will have lost a good part of their productive capacity, creating a bottleneck that will raise prices until supply and demand find their equilibrium again.

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