High inflation rate: fear of the wage-price spiral

Status: 11/30/2021 6:55 am

Savers and consumers are currently experiencing new inflation shocks month after month. The ECB is reassuring and predicting lower inflation rates for 2022. But what happens when the wage-price spiral sets in?

By Notker Blechner, tagesschau.de

For a long time, inflation was not a big issue. The rate of inflation remained for years at less than one percent in this country – and drove the European Central Bank (ECB) almost to despair. Because the money guards are aiming for an inflation rate of two percent in the euro area in the medium term in order to achieve stable prices.

The corona pandemic has radically changed the situation. This year inflation, which was believed to be almost dead, has reawakened. In November, inflation climbed above the five percent mark for the first time in 29 years.

The “ketchup effect”

Some economists feel confirmed. Inflation is like ketchup: you knock on the bottle for a long time without doing anything, and suddenly everything spurts out of the bottle.

The ECB, however, sees no cause for concern. There are no indications that inflation is getting out of control, said board member Isabel Schnabel yesterday in a joint meeting Morning magazine from ARD and ZDF. “We assume that the peak of inflation will be reached in November,” said the currency watchdog. The rate of inflation is likely to gradually decline again towards two percent in 2022, the ECB’s target. Special effects such as the VAT cut in Germany last year would fall out of the statistics from January. And energy prices will not continue to rise as rapidly as in 2021, believes Schnabel.

ECB downplays risks

ECB President Christine Lagarde considers the high inflation in the euro area to be a temporary phenomenon and sees it above all as a German phenomenon. The temporary lowering and raising of VAT in this country currently accounts for around 1.2 percentage points of the German inflation rate, she recently explained at the virtual European Banking Congress in Frankfurt. From July to December, when measuring inflation, prices with the higher VAT from this year would be compared to those with the lower tax 2020.

Top bankers and economists disagree with Lagarde. “This inflation will last longer, and the inflation rates will remain higher than many think,” said Deutsche Bank boss Christian Sewing at the Frankfurt banking congress. Commerzbank boss Manfred Knof also emphasizes that inflation has come to stay.

Economists: Inflation will remain high in 2022

“The ECB is downplaying the inflation risks,” complains Gertrud Traud, chief economist at Landesbank Hessen-Thüringen (Helaba). It is wrong that the high inflation is due only to Germany. She points to even higher inflation rates in the Baltic states, among others. Traud doubts that inflation is only temporary. For 2022, it predicts that consumer prices will increase at a similar rate as in the previous year – by 2.4 percent in the euro zone and by 2.7 percent in Germany.

Jörg Krämer, chief economist at Commerzbank, sees it similarly. For technical reasons, inflation will fall after the turn of the year, since the VAT effect will no longer apply. But the decline is likely to be temporary, he believes. “After that there will be a slow drift – with a clear direction.” In a few years’ time, “inflation rates will then be well over two percent,” he recently predicted. Above all, he sees the ECB as a driver of inflation, which is bringing a lot of money into circulation with its bond purchases.

People buy out of fear

Although delivery bottlenecks would be overcome by the middle of next year, there would then be new effects that increase inflation, says ex-Ifo boss and author Hans-Werner Sinn. The “Huckel inflation” changed the inflation expectations. “People are afraid that it will be more expensive. In anticipation of price increases in the future, they buy in advance,” he said in an interview with “Die Welt”. The higher demand then drives prices up again. Above all, there is a threat of a wage-price spiral.

Rising consumer prices are driving workers to demand higher wages and salaries so that they do not lose purchasing power. “The unions will add this year’s inflation to their demands in the wage negotiations next year,” speculates economist Sinn. Immediately “companies will be forced to raise prices because of the increased costs”. “At the moment, more companies in Germany want to raise their prices than ever before,” says Timo Wollmershäuser, Head of Economic Forecasts at the Ifo Institute. According to the survey, 45 percent of companies plan to turn the price screw in the next three months.

Is there a threat of a wage-price spiral like in the 70s?

Some experts are already drawing parallels to the 1970s. Back then, the unions used inflation as an argument to push through wage increases of up to 14 percent. Christoph Schröder, economist from the Institute for the German Economy, has observed in historical studies that sharply rising prices always lead to significant wage increases. That was the case not only in the 1970s, but also in the 1990s after reunification.

In fact, the agreement on collective bargaining in the public sector points to higher wage demands. The approximately 1.1 million collective bargaining employees in the federal states get 2.8 percent more money. ING chief economist Carsten Brzeski sees the conclusion as an indication of a “gentle wage-price spiral”.

“Danger not to be underestimated”

“The danger that a wage-price spiral will set in motion this year should not be underestimated,” says Holger Bonin from the Institute for the Future of Work tagesschau.de. “Employees are now feeling the increase in the cost of living quite clearly in their everyday lives and are likely to demand compensation. And it looks like many companies are currently passing their rising costs on to customers through prices. This can turn the spiral upwards. ”

Economist Marcel Fratzscher considers such fears to be exaggerated. “In the past 30 years, the share of wages in economic output in Germany has fallen slightly.” He does not see a wage-price spiral like in the 1970s with inflation rates of seven or eight percent.

Spiral already started in the USA

The USA shows how quickly a wage-price spiral can set in motion. There, according to Commerzbank chief economist Krämer, the rise in labor costs has accelerated massively. “There are signs of a broad-based price increase in the US.”

In Germany, too, there are isolated indications of significant wage increases. At a SME congress in southern Germany, representatives recently reported on tech companies in Munich that were trying to attract skilled workers with salary increases of over ten percent. What about the “ketchup effect”?


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